The stock market regulator continues to press ahead in its zeal to shorten the settlement cycle, disregarding the signals from the market. The Securities and Exchange Board of India (SEBI) launched the beta version of T+0 rolling settlement in March 2024. Under this, the buyer gets the shares, and the seller receives the funds on the day the trade is executed. The beta version was introduced in only 25 stocks. It was made optional, which meant that brokers could choose to either continue settling under the existing T+1 basis (where the settlement takes place a day after trade execution) or opt for T+0 settlement in the specified stocks. The learnings from the beta version were intended to guide the regulator in expanding the system.

Despite more than 200 brokers participating in the trial run, T+0 has not evoked any interest from investors. According to media reports, only around 125 trades have been done in this system so far since March, indicating lack of investor interest. The market regulator is of the view that systems at the market infrastructure institutions and banks are ready for real time settlement of trades, and that shorter cycles will improve market efficiency. But investors in Indian markets already enjoy one of the fastest settlement cycles globally, and do not appear interested in reducing the cycle further. Given the tepid response to the beta version, it is surprising that SEBI is now expanding the T+0 settlement to the top 500 stocks, based on market capitalisation.

The fundamental question is whether T+0 settlement is good for stock markets. India was among the forerunners in implementing the T+1 settlement, completely transitioning to this system by January 2023. The US and Canadian markets moved to T+1 system only in May 2024. Most of Europe, including the UK still follow a slower T+2 settlement. There may be little need to scrunch the settlement time further, given the heightened trading activity in the equity cash and derivative segments. Analysis done by SEBI had revealed that retail investors with limited capital are speculating on leveraged money. Shorter settlement time will enable more trades, exposing these investors to higher risk.

Besides, with the T+0 being offered on an optional basis, the liquidity in each stock will be divided between T+0 and T+1 settlements, affecting trading efficiency. Though the prices in T+0 are being linked to the prices discovered under T+1 settlement, it will be possible to influence stock price movement through T+0 stocks, where liquidity could be lower. Foreign investors were unhappy when T+1 was introduced in 2021, citing problems in managing cash flows across global markets if India moves to a different trading cycle. With most markets still following T+2 settlement, complete transition to T+0 in Indian markets will inconvenience foreign investors. The regulator should carefully watch this space over the next few months and postpone the transition, if necessary.