How T+0 Settlement Mode Will Impact Shareholders: A Comprehensive Analysis

Introduction

The Securities and Exchange Board of India (SEBI) has introduced a significant change in the Indian stock market landscape with the implementation of the T+0 settlement mode. This move aims to streamline trading processes and enhance market efficiency. SEBI has announced the introduction of a new and optional settlement cycle, stating, "The Board has approved the launch of a Beta version of the optional T+0 settlement, focusing on a restricted selection of 25 scrips and involving a limited number of brokers starting March 28, 2024. Concurrently, SEBI will engage in additional stakeholder consultations, including with users of the Beta version." However, such a fundamental alteration inevitably raises questions about its impact on shareholders, traders, and the overall market dynamics. In this article, we delve into the comprehensive analysis of how the T+0 settlement mode will influence shareholders.

What is T+0 Settlement?

1. T+0 settlement streamlines the trading process by allowing for immediate settlement of both funds and securities transactions, eliminating the need to wait for the next day for settlement. In contrast, the existing T+1 settlement cycle in the Indian securities markets requires investors to wait until the following day for settlement, potentially causing delays in accessing funds or securities.
2. Notably, the T+0 settlement cycle will now be offered as an alternative alongside T+1. Further, the adoption of shorter settlement cycles is expected to mitigate counterparty risk and enhance market liquidity.
3. The band for adjustments will change following every 50 basis points shift in the T+1 market.
4. Participation in the T+0 settlement cycle is open to all investors, provided they adhere to the timelines, procedures, and risk criteria established by Market Infrastructure Institutions (MIIs).
5. Surveillance protocols applicable in the T+1 settlement cycle will also extend to securities within the T+0 settlement cycle, and trading in this segment will transpire throughout a single continuous session from 9:15 AM to 1:30 PM.
6. T+0 prices won't influence index calculation or settlement price determination, and securities traded in the T+0 segment won't have a distinct closing price.
7. Furthermore, obligations between the T+1 and T+0 settlement cycles won't be offset, aligning with SEBI's goal of simplifying and accelerating the settlement process to enhance flexibility and efficiency for market participants.
8. Countries like Russia, South Korea, Taiwan, and Hong Kong have adopted T+0 settlements for specific securities aiming to minimize counterparty risk, enhance market efficiency, and align with global standards.

Impact on Shareholders: Challenges and Considerations

1. India's depository system possesses digital records of individual client holdings, enabling instantaneous securities transfers. Similarly, India's payments and settlements infrastructure has long supported real-time fund transfers.
2. The regulatory authority foresees that a condensed settlement cycle will enhance cost and time efficiency, ensure transparency in investor charges, and fortify risk management practices at clearing corporations, ultimately bolstering the securities market ecosystem as a whole.
3. As regulators contemplate the adoption of a T+0 settlement system in the Indian stock market, aligning with international financial market norms, significant transformations are anticipated. This initiative, geared towards enabling immediate trade settlements, has attracted scrutiny from industry experts who assess both its potential advantages and hurdles.
4. CA Rakesh Mehta, Chairman of Mehta Group-Mehta Equities Ltd, emphasizes the diminishing of counterparty risk and the enhancement of market efficiency achieved by the prompt exchange of funds and securities among buyers and sellers as pivotal advantages. Additionally, he recognizes the potential for significant operational cost reductions for market participants and decreased funding expenses for brokers.
5. Caution was advised that implementing this change would necessitate a comprehensive overhaul of the current market infrastructure, systems, and processes, entailing complex and potentially costly modifications to be made promptly. Additionally, concerns were raised about the possibility of increased market volatility resulting from a shorter settlement cycle.

Conclusion

The introduction of the T+0 settlement mode represents a significant milestone in the evolution of the Indian stock market. While it offers numerous benefits such as increased liquidity, reduced counterparty risk, and enhanced trading opportunities for shareholders, it also presents operational challenges and regulatory considerations. By addressing these challenges proactively and fostering investor education, stakeholders can harness the full potential of T+0 settlement to create a more efficient and resilient market ecosystem.

References

https://www.financialexpress.com/market/sebi-introduces-t0-settlement-a-look-at-how-this-short-settlement-mode-will-impact-shareholders-3427057/

https://www.newindianexpress.com/business/2024/Mar/22/sebi-to-launch-t0-trade-settlement-with-25-scrips

https://www.indiatoday.in/business/story/sebi-to-launch-beta-version-of-t0-trade-settlement-from-march-28-2517813-2024-03-21

https://www.livemint.com/money/personal-finance/applying-for-a-personal-loan-from-eligibility-criteria-to-documents-required-key-things-to-keep-in-mind-11709639581733.html