T+0 settlement cycle sees tepid response even after eight months of launch

Market participants attribute the lacklustre response to the fact that there is no real incentive or benefit for the investors

The Indian stock markets created a record of sorts when the T+0 settlement cycle was launched around eight months back as it became the only leading market globally with such a short settlement mechanism in the markets.

While the launch was a milestone event, the optional shorter settlement cycle has seen a subdued response from the market and there is hardly any traction as participants are continuing with the T+1 cycle.

Market participants attribute the lacklustre response to the fact that there is no real incentive or benefit for the investors apart from the fact that the shares or funds are credited on the day of the transaction instead of next day. There are a few operational issues as well that need to be addressed, they add.

T+0 settlement cycle refers to a mechanism wherein the shares – in a buy transaction -- are credited in the demat account on the day of the trade (T) itself. In the case of shares being sold, the sale proceeds are credited on the same day.

The trade files provided by the exchange are typically delayed and only reach us by 4:30 PM, while brokers are required to complete their pay-ins by 3:30 PM, said a person from a leading brokerage firm. The person added that these trade files serve as the definitive source of data for all trades executed by the broker. Under the T+0 settlement model, the settlement itself must be completed by 3:30 PM. However, given the short window between 1:30 PM and 3:30 PM, it is currently not feasible to receive the trade files from the exchange, and complete the pay-in.

To address this, brokers have submitted suggestions to the regulator on how to expedite the T+0 process, the person added. One such suggestion involves segregating T+1 and T+0 data within the trade files, which would allow for quicker processing of the T+0 data sent to brokers, he adds.

A major reason for no volumes in the T+0 settlement is the absence of anything new being offered to the client, say experts. Unless it is an emergency, no investor would choose the T+0 settlement as there is no liquidity and they're happy with getting settlement the next day.

The lack of volumes in T+0 settlement is largely due to the limited decision-making window it offers compared to T+1, says Arjun Shah, Director DealDepot Brokerage Pvt Ltd. “In T+1, clients have until 3:30 pm to make their decisions, but T+0 doesn't provide that flexibility,” he says.

He, however, added that the regulator's efforts to establish a direct settlement framework for funds and shares between clearing corporations and clients will pave the way for a seamless transition to a T+0 settlement cycle.

The hard stop of 12:30pm is a hurdle for investors especially those that do not want to place a market order and instead a limit order with a target entry or exit price since if the order does not get triggered before 12:30pm then it will not qualify for T+0 cycle, said a broker.

In contrast, the T+1 system offers investors time until 3:30pm to get the order executed, providing more flexibility and time to trade.

Experts further say that for foreign portfolio investors (FPIs), T+0 seems like a dream that cannot come true. While FPIs may opt for T+0, the actual settlement often stretches to T+2 or even T+3, said Trivesh D, Chief Operating Officer, Tradejini. This delay arises because Indian banks need to transfer funds to foreign counterparties in other countries -- a process that is not feasible within the T+0 timeline, he said.

Market participants believe that till the time T+0 settlement cycle remains optional and the operational issues are not resolved, there will not be much traction.

“Only when T+0 becomes compulsory, will regulators begin addressing related challenges, such as aligning dividend dates, ex-bonus dates, and other operational aspects,” said Trivesh.

Incidentally, given the overall low interest level for T+0, investors who genuinely want to participate face liquidity issues as there is hardly a counterparty on the other side of the transaction who is ready to trade on a T+0 basis.

An investor looking to sell shares might want to get same day settlement but there should be some buyer on the other side to match the trade, which is mostly not the case, said another broker on the condition of anonymity.

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