Last week, the Securities and Exchange Board of India (SEBI) gave a big push to deepen the T+0 settlement cycle by extending the number of stocks to 500, giving brokers incentive to charge differently. The regulator also made it mandatory for all brokers to offer the option to investors. These actions come against the backdrop of negligible activity in the T+0 segment since its launch with 25 stocks in March. The beta version has seen just 125 trades in the last seven months, with transactions of less than Rs 10 lakh. Worse, there has been no trade under this cycle on the National Stock Exchange and the Bombay Stock Exchange (BSE) since September and June, respectively. Clearly, despite the hard-sell by SEBI’s top management, brokers and investors don’t seem to be convinced about the utility of this settlement cycle.
Amid all this, SEBI’s whole-time director, Ananth Narayan, made a statement on Thursday that there is Rs 4.5 lakh crore of float lying with brokers, and they are earning hidden revenue from this. Add to this the market regulator’s assessment that over 90% of the equity delivery trades where trade value was less than Rs 1 lakh were conducted with advance deposits of cash and securities. So, there is definitely a case for T+0. Of course, in the past two decades, Indian stock markets have come a long way in terms of settlement cycles. In the 1990s, it was T+15, which came down to T+3 in 2002, followed by T+2 in 2003 and T+1 in 2021. T+0 is also a precursor to instantaneous settlement—both, if implemented fully, will be for the first time in the world.
But there are many roadblocks. The retail investor, who could benefit from this move, has to be convinced about its utility. Currently, the money will be deposited after 5 pm in the evening if someone sells the stock before 1:30 pm. So, unless the investor is putting money in the currency or commodities market, which are open till late, the money will lie unused in the bank account. Yes, there could be a use case for someone wanting to meet a personal obligation, but that’s not enough. There could be some interest income for the investor by keeping the money overnight in the bank, but there has to be a cost-benefit analysis of paying a higher brokerage for T+0 settlement and earning interest income. In addition, there are fears of getting a lower price due to one day’s carrying cost.
For brokerages, to ensure that the payment is done by evening means adding another cost centre in terms of an additional team that will execute the same. Most would be seeking a return on investment on this additional cost.
The biggest pressure will be on the stock exchanges, clearing corporations, and depositories, particularly because of two parallel systems (both T+0 and T+1 running at the same time). Sebi wants to stay ahead of the curve as even advanced markets like the US have transitioned to T+1 only recently. The SEBI chief had also made a very strong pitch that funds will move away from the regulated markets towards crypto and similar assets if we do not move towards T+0 and, ultimately, instantaneous settlement. The market regulator’s intentions are noble, as improvement in liquidity and faster trades will help in reducing counterparty risks. The challenge is to convince the stakeholders of its benefits.