T+0 Settlement Explained: How It Works To Enable Faster Trades

India will have a same-day cash equity trade settlement this month, as the T+0 settlement is expected to become a reality on March 28.

"The proposal to have stock trades settle on the same day will go into effect on March 28 on an optional basis for certain investors," SEBI Chairperson Madhabi Puri Buch had said. Following this, the regulator will take one year to move to instant settlement by March next year.

It refers to the process of settling trades on the same day, which means that the seller of stocks will receive money on the day of sale instead of an earlier T+1. 

Currently, the settlement happens on the T+1 cycle, which means that the funds are settled by the next day of trade. It was introduced in 2021 in a phased manner and was then fully implemented in January 2023.

The market regulator had proposed the implementation of T+0 settlement in two phases for the equity cash segment. In addition to the existing T+1 settlement cycle, the shorter settlement cycle will be introduced as an option.

Reducing settlement time and, hence, increasing the operational efficiency of dealing in Indian securities can further draw and retain investors into this asset class, as per experts.

• In Phase 1: An optional T+0 settlement cycle—for trades till 1:30 p.m.—is envisaged, with settlement of funds and securities to be completed on the same day by 4:30 p.m.

• In Phase 2: An optional immediate trade-by-trade settlement may be carried out. In the second phase, trading will be carried out till 3.30 p.m.

• After the implementation of phase 2 (optional instant settlement), the mechanism of optional T+0 settlement implemented under phase 1 will be discontinued.

In December 2023, the regulator released a consultation paper outlining the settlement mechanism. It also sought comments on potential challenges and tried to address concerns about fragmented liquidity raised by several foreign portfolio investors and institutional investors.

On liquidity fragmentation, there will be participants who can access both T+0 (or instant settlement) and T+1 markets and would bridge price and liquidity gaps between the two segments, said the consultation paper.

The T+0 settlement process will be a parallel process that is optional. It will be applicable to non-custodian or non-institutional clients, as per the SEBI Chairperson.

The proposal to exclude custodian clients in phase 1 is done after considering the timelines required for processing custodial trades, the limited availability of time for completion of settlement, and their current exemption from margin requirements.

To begin with, a T+0 settlement shall be made available in the top 500 listed equity shares based on market capitalisation. This will be done in three tranches of 200, 200, and 100, from lowest to highest market cap.

Since it is on an optional basis, investors who do not have a demat account with the broker may not opt for this. Also, traders who exercise regular BTST (buy today, sell tomorrow) trades and those who use margin trading regularly would not be the early adopters of the cycle.