Accelerating India’s Stock Market: The T+0 Trade Settlement Vision

Kotak Insights | Date 06/10/2023

Have you ever felt the agony of waiting a day before those shares you just bought land in your account?

Well, market regulator SEBI wants to rid you of that pain. It wants these stocks delivered in your account within an hour!

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But before we go onto that, let’s take a look at how things work today:

Picture this - you are all set to buy 100 shares of Company XYZ at ₹10 per share. First things first, you deposit ₹1,000 into your trading account. Now, once the money is in, you hit the 'buy' button and the magic begins…

Your broker starts a conversation with the stock exchange where the company is listed, be it Bombay Stock Exchange (BSE) or National Stock Exchange (NSE). These exchanges then hunt for someone willing to sell your stock at your desired price. And if it's a match, the order gets a green light.

Then comes the clearing house — they're like the trade referees.

They figure out how much you owe to the seller and what shares should land in your account. This isn’t a walk in the park, considering you're not the only one trading. There are millions of trades happening daily. So, it’s a thrilling juggling act to match all the buyers and sellers at thousands of price points.

But once this nitty-gritty is sorted, it’s time for the settlement.

The money moves from the broker to a special clearing bank. The two depositories – NSDL and CDSL – which hold shares for every investor in the country, commence the process of shifting the required shares from one account to another.

You get the shares. The seller gets the money.

And that’s how the entire process works behind your buy or sell button.

In the past, this whole thing took about a whopping 7 days.

Yes, a full week. Physical certificates were issued and cheques changed hands for buying and selling shares.

But come 2000s, things changed when we moved to a T+5 settlement cycle.

Within a few years, that shifted to T+3 and then T+2.

The 'T' above stands for the day the trade was placed and the following number denotes the day it took for the trade to get settled.

So, everything was accelerating with T+2.

But last year, SEBI aimed higher and shifted to a T+1 cycle. That means everything gets settled within 24 hours.

And so they did just that. Phased and smooth.

But as if that wasn't enough, SEBI is now considering a T+0 settlement.

What does that mean, you ask? Well, it means that if you buy a stock, it’ll appear in your account within an hour!

And how’s it progressing?

Well, the tech is ready, and this could be a game-changer when implemented.

And the burning question - how will this change or affect things?

Well, if you sell shares today and the money lands in your account only tomorrow, you’re twiddling your thumbs before you can make another trade because your money’s held captive for 24 hours.

But faster settlement can change that. The money hits your account in a flash, and you can place your next trade almost immediately with the cash will be having with T+0 settlement process. This could turbocharge liquidity in the market.

It could also boost the trading of illiquid stocks and enhance market transparency.

For individual traders and brokers, T+0 settlements would mean no more waiting for the funds to hit their account. The money's there, and you're ready to make your next move. However, this might lead to a reduction in leveraged trades as the risks associated with buying shares without waiting for funds could deter some traders.

Talk about a financial facelift!

For mutual funds, the move to T+0 settlements would require adjustments in their modus operandi. Fund managers will need to adapt swiftly to the lightning-fast settlement times. Instant settlement would also mean these funds receiving the proceeds from their redemptions more quickly.

There could be a flip side for foreign investors. Because these folks operate from different time zones and trade in multiple countries, they deal with forex fluctuations. They have to communicate with custodians who hold securities for them before settling trades. And they say this process takes time. So, foreign investors might have to pre-fund their account with significant amounts. And if they don’t feel like buying any instrument, this money might sit idle, without earning any interest on it.

While the potential benefits of T+0 settlements are exhilarating, there are also roadblocks to navigate.

Immediate settlement poses operational challenges, especially for brokers and clearing corporations. The process needs to be streamlined and flawless to prevent any disruptions in the market. And managing the surge in transaction volume and ensuring the security and accuracy of settlements are paramount.

In conclusion, in the ever-evolving world of finance, innovation is the key to staying ahead.

The vision for instant trade settlements, aiming for T+0, could be a testament to this.

The potential transformation from waiting days to seeing shares in your account within an hour is groundbreaking.

However, with great power comes great responsibility, and adapting to this change will be a journey, and how it unfolds will reshape the Indian stock market, potentially defining the future of trading.

What are your thoughts on this? Let us know in the comments!

Speaking of market developments, the Nifty recently crossed a record high of 20K and if you are looking for trade strategies to navigate these changes, check out this latest webinar from our research team: Stocks & Strategy – October 2023

Until next time…

Happy Learning!

Sources: Kotak Securities, Economic Times

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.