T+1 settlement is here but why not T+0? Nithin Kamath explains

NEW DELHI: India will be the second major market after China to implement the T+1 settlement cycle of stocks. At present, when an investor buys stocks, they get credited in the Demat account after two days. Similarly, on selling stocks, one can withdraw the funds only after two days. This two-day period will now become a one-day affair from February 25, 2022, for an initial set of 100 stocks.

Not being able to withdraw funds for two days is the most asked question to Zerodha‘s customer support, company’s founder Nithin Kamath said in a blog post. “Hopefully this will reduce some support effort for our team,” he added.

But why can’t there be a T+0 settlement cycle in India where UPI is powering almost 4 billion bank transfers a month, all settled instantly?

To answer this, Kamath explains that one needs to understand 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 and money.

“While stocks are also in a digital format and can potentially be moved instantly, they can’t really be moved instantly because of intraday trading. 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,” he explained.

Typically this intraday trader will exit his position before the end of the day, Kamath said, adding that the 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 crystallised, 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 crystallise the obligations and then clearing corporations to settle,” he added.

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