What extending T+0 settlement to 500 stocks may mean for market liquidity

The Indian stock market is not only among the largest globally by market capitalisation but is also seen as one of the most efficient. To further improve market efficiency, the Securities and Exchange Board of India (Sebi) earlier this year introduced the beta version for T+0 (same-day) settlement on an optional basis for 25 scrips in the equity cash market. Based on the feedback and experience over the past several months, the regulator has now decided to extend the facility to the top 500 stocks. This shows, in Sebi’s view, that the market infrastructure and the institutions involved are prepared to make this big transition at scale. Although reports suggest that the adoption of T+0 has been slow, it should not deter the regulator from taking steps to improve market efficiency. The adoption may be low partly because of the limited number of stocks in the new settlement cycle.

 

According to the Sebi circular, the T+0 cycle will be available on an optional basis for the top 500 companies by market capitalisation from January 31, 2025. Scrips will be moved to the new cycle in batches of 100 starting with the bottom of the group. This makes sense as companies with comparably low volumes will be moved first, which will help test the resilience of the system. The bigger companies will be moved to the new settlement cycle progressively. All stockbrokers will now be allowed to participate. They will also be allowed to charge different brokerages for T+0 and T+1 settlements, subject to regulatory limits. Qualified stockbrokers who meet certain conditions in terms of client base will be expected to put in place the required systems and processes to enable uninterrupted participation in the new settlement cycle within the given timeframe.

 

Meanwhile, stock exchanges, clearing corporations, and depositories— collectively referred to as market infrastructure institutions (MIIs) — will also be expected to put in place the necessary systems for a seamless rollout. Further, to enable smooth implementation, MIIs are expected to come out with operational guidelines and frequently asked questions. This will help all stakeholders, particularly individual investors, to move to the new cycle. For large block deals in T+0, stock exchanges are expected to put a mechanism in place. The move to scale up the T+0 mechanism must be welcomed, particularly from the point of view of small investors. As highlighted in this space earlier, an assessment by the regulator found that over 90 per cent of the equity delivery trades where trade value was less than ~1 lakh were conducted with advance deposits of cash and securities. Therefore, a majority of small traders and investors will benefit from the move, as it will help improve liquidity.

 

Overall, the improvement in liquidity and faster closure of trades will help in reducing counterparty risks. While a quicker settlement cycle will help investors, it could put pressure on MIIs, particularly because of two parallel systems. However, given that the Indian market infrastructure has enabled a shorter settlement cycle over time, it is hoped that the system will move to the T+0 cycle seamlessly. Given the improved infrastructure and the ability of all stakeholders to adapt, the market regulator would do well to aim now to shorten the cycle in the primary market. There is ample scope for reducing the time gap between the opening of an initial public offering and the listing of the stock.