You could be in for a loss. That is if you calculated the time that it took between “buying” or “selling” and the stock either arriving or exiting your demat account. This is a situation where a concept like T 0 settlement helps investors.

Understanding how T 0 settlement works is essential not only to book good profits but can also come in handy in cases where there is significant volatility in the stock price, and therefore, a higher probability of a loss.

T 0 settlement, also known as same-day settlement, refers to the process where stock transactions are completed on the same trading day they are initiated. So, let’s say you are buying some stocks of Reliance Industries Limited. With T 0, the shares will reflect in a buyer’s account in the same trading session, as opposed to one-day or two days in the previous regime

We live in an era where financial transactions have become so spontaneous that it takes a blink of an eye for a P2P transaction (like paying for a bus ticket, paying taxi fare, or any payment via a QR code). Naturally, stock market players are likely to expect the same kind of speed as an Amazon Prime user. However, T 0 is currently the fastest mode of settlement possible

The shift from T 1 to T 0 aims to enhance market efficiency, reduce counterparty risk, and meet the demands of modern, high-speed trading environments.

But wait, there’s more to T 0 than just speed and accuracy. In fact, you would be surprised to note that not all stocks can be settled in a T 0 fashion. In India, according to official data from bourses (Business standard), most stocks are tradable in a T 1 settlement cycle. Not many stocks are available to trade in T 0. Understanding the process and relevance of how the stock markets operate is crucial to every investor. We have simplified it for you, and it should take not more than 4 minutes of your time to get the crux right.

Historical Overview of Settlement Cycles 

India has been at the forefront of adopting cutting edge technologies in stock trading and settlement processes. Many of these innovative approaches were possible with the availability of new technology. But many changes were also instituted keeping in mind the need to improve ease of trading for investors;

Here’s a quick table depicting how each epoch saw the emergence of a new trading settlement process.

For better reference, India moved to a T 2 settlement process on April 1, 2003 and T 1 as on January 27, 2023 (Moneycontrol).

Looking at the table, one can surmise that the adoption of T 0 settlement practices is not widespread. In fact, developed markets such as the United States have only recently migrated to a T 1 settlement process. Although, countries like South Korea and Singapore have already moved to a T 0 settlement process.

It’s heartening, however, to note that India completed the transition from T 2 to T 1 by March 2023. As of March 2024 (Nse India), the country transitioned to T 0 as part of a pilot-beta for 25 stocks trading on the BSE and NSE. Before we get into the magical stocks that can be traded in T 0 , let’s do an impact assessment of who it affects - positively and negatively.

Impact on Investors and Brokers 

Shifting to T 0 settlement offers substantial benefits. There’s increased liquidity and reduced credit risk. But, it’s like a double-edged sword having some challenges as well.

This means that retail, institutional investors, and brokers, must navigate increased operational demands and the potential for errors. Institutional investors, in particular, face specific challenges related to internal systems upgrades, real-time risk management, and accelerating decision-making processes.

Cost-Benefit analysis for retail investors, institutional investors, and brokers.

1. Retail Investors: Allows for the immediate reinvestment of capital after a sale. With T 0, retail investors can receive funds instantly and can use those funds to either buy other stocks or put it to alternative uses. This helps improve trading frequencies and respond to market opportunities better. On the flip side though, faster transactions require more diligent account monitoring.

2. Institutional Investors: For investors like large investment banks, mutual funds, and pension funds, a T 0 settlement means they can move substantial sums of money faster. This helps optimise their cash flow management and investment strategies. To handle the speed, however, such institutions must maintain efficient risk management protocols and systems. In fact, many FPIs had shared their concerns about arranging forex and the cumbersome process with SEBI.

3. Brokers: A higher trading volume with faster settlement cycle encourages more transactions, improving their revenue potential. Moreover, a T 0 reduces the capital required to maintain margin accounts, which in turn frees up resources for other uses. The biggest cost in moving to T 0 is the investment needed to set up robust IT infrastructure to support the settlement process. This includes ensuring systems are capable of handling the increased transaction load and minimising errors, which can be costly and damaging to client relationships.

Considering the risks and challenges, several financial analysts have formed a balanced opinion. As such, when it comes to trading, one should evaluate all the pros and cons and decide based on what works best for them.

5 Crucial Things to know about T 0 Settlement 

The news of the introduction of the T 0 settlement process has spurred markets and investors. Here are five crucial takeaways that you should be aware of.

1. Optional Basis: The T 0 settlement cycle is introduced as an optional system alongside the existing T 1 cycle in the equity cash markets.

2. Objective: The initiative aims to enhance market efficiency and reduce settlement risks.

3. Beta Version: The T 0 cycle is being launched as a beta version to gather feedback and make necessary adjustments before full implementation.

4. Implementation Date: The T 0 cycle will be available starting from April 1, 2024.

5. Operational Guidelines: Detailed operational guidelines and processes will be provided by SEBI to ensure smooth functioning and adherence to the new cycle.

For more information, you can read the detailed circular here (Sebi).

Stocks Eligible for NSE T 0 Settlement

Now, let’s explore the truly wonderful aspect of what stocks can be traded on a T 0 basis in India.

To be eligible for T 0 settlement on the National Stock Exchange (NSE) in India, stocks must meet several criteria. These include having a high market capitalization to ensure stability, high liquidity to facilitate quick transactions, and low volatility to minimise the risk of price discrepancies. Additionally, the stocks must comply with regulatory requirements set by the Securities and Exchange Board of India (SEBI), have a robust trading history, be operationally feasible within the NSE's technological infrastructure, and demonstrate significant and consistent demand among investors.

Stocks typically involved in T 0 transactions are characterised by their large market caps, high trading volumes, and relatively stable price movements. Examples include well-known blue-chip companies such as Reliance Industries, TCS, HDFC Bank, Infosys, and ICICI Bank. These stocks are chosen because they offer a balance of stability and liquidity, making them suitable for the demands of same-day settlements. Blue-chip stocks, in particular, are preferred due to their predictable performance and lower risk profiles.

Overall, the NSE's criteria and the characteristics of the stocks involved ensure that T 0 settlement is practical and efficient, enhancing market liquidity and reducing credit risk. This selection process aims to maintain a stable and reliable trading environment, benefiting both retail and institutional investors by enabling quicker reinvestment of capital and minimising the risks associated with delayed settlements.

Is T-Instant Possible? 

The availability of faster technology protocols, including blockchain, means that your trading experience could travel as fast as the speed of light! With techniques such as blockchain, some experts have also argued the possibility of trading which could be as fast as P2P payments.

Instant-T settlements may further streamline trading processes. They are likely to offer immutable and transparent transaction records that can be verified in real-time. Moreover, the decentralized nature of blockchain networks eliminates the need for intermediaries, reducing costs and increasing efficiency in settlement processes.

However, widespread adoption of T Instant settlements will require overcoming several regulatory hurdles, ensuring interoperability between different market infrastructures, and addressing concerns regarding scalability and security.

Your journey towards a shorter settlement cycle will require careful consideration. A credible institution like Sharekhan can prove to be a vital tool in decoding the market. You get access to a wide-variety of information, insights, and our advanced trading platform with unparalleled expert advice to make informed investment decisions.

Our robust infrastructure facilitates seamless execution and settlement of trades, ensuring timely and efficient transactions. So, what are you waiting for? Go ahead and click on that sign-up button to realise your financial goals today.