Zerodha’s Nithin Kamath explains why T+0 settlement is not possible in Indian markets
- Zerodha boss Nithin Kamath says unlike in bank transfers where there is one underlying that moves between two accounts - money, in the stock markets there are two legs - stocks and money
Zerodha boss Nithin Kamath on Wednesday said the biggest benefit of Sebi's proposed T+1 settlement cycle, which comes into effect from February 2022, is that investors can withdraw funds within one day when they sell stocks.
Currently, investors will get fund settlement in trading + two days (T+2), however, it will change when Sebi's new rules of T+1 kick in. The T+1 settlement cycle will be introduced in a phased manner in the Indian markets.
The settlement cycle in stock markets refers to the time between the trade date, when an order is executed in the market, and the settlement date, when participants exchange cash for securities or shares.
Sebi has taken this move in consultation with market infrastructure institutions such as stock exchanges, clearing corporations and depositors. A few market players have express their concerns on operation problems in this arrangement of T+1 settlement.
Reducing the settlement cycle will create greater efficiencies in the market and further protect investors’ interest. Accelerating the settlement cycle will help reduce operational risk, liquidity needs, counterparty risk which would also reduce margin requirements and collateral requirements for broker-dealers.
“India will be the second large market after China to implement the T+1 settlement cycle of stocks,” Nithin Kamath said in a tweet.
Starting 25 Februrary, 2022, 100 stocks (starting with the lowest market cap) will move to the T+1 settlement cycle on both exchanges simultaneously. From March 2022, 500 stocks ranked from the bottom will move to T+1 settlement cycle. By October 2022, all the stocks in Indian markets are likely to be on the T+1 settlement cycle.
The Zerodha boss further shared a post where he explained why T+0 settlement cycle is not an option yet for investors.
"What you need to understand is that unlike in bank transfers where there is one underlying that moves between two accounts - money, in the stock markets there are two legs. Stocks & money. While stocks are also in digital format and can potentially be moved instantly, it can’t really be moved instantly because of intraday trading," Kamath said in a post.
"The majority of trading volumes on the stock market is from intraday traders who are buying and selling stocks without taking or giving delivery of the stock. so if you did buy shares of a company from an intraday trader on the exchange, he might not have any shares to instantly transfer to your Demat account, Kamath added.
Typically an intraday trader will exit his position before the end of the day and that obligation to deliver the stock will eventually land with someone who holds the stock. At the end of the day all such buy and sell obligations are crystallized, brokers transfer the stocks and money to the clearing corporation that settle the transaction.
"While instant settlement is impossible, even T+0 is extremely tough considering the time required for brokers to crystallize the obligations and then clearing corporations to settle," Nithin Kamath noted.
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