Zerodha’s Nithin Kamath explains why instant stock market settlement isn’t possible

Zerodha Founder and Chief Executive Officer Nithin Kamath offered his two cents on Wednesday on why instant stock market settlement like payments isn’t possible.

“This is because most trading volumes on the exchange are from intraday traders who buy and sell stocks without taking delivery or have the stocks to deliver immediately,» Kamath said on Twitter.

As shares of about 200 of India’s biggest listed companies are set to move to a faster settlement cycle, the Zerodha boss said, “Starting tomorrow, India will become the first major market to completely move to a T+1 settlement cycle (China is partly T+1).»

“It is crazy how far ahead we are in terms of market infrastructure and safety, even when compared to the developed world,» he said in a series of tweets.

Explaining further, Kamath said, “So if you buy a stock, you get it in your demat the next day, and If you sell, you will have the funds by the next day. This used to take T+2 days.»

“The transition to T+1 has been happening in batches based on market cap (small to big) since Feb 2022,» he noted.

“The implementation of the T+1 settlement is truly a commendable model which will help in protecting investor interest. India is the second country to be implementing this, after China. The Indian broking sector has advanced significantly, thanks to various initiatives introduced by SEBI,» said Puneet Maheshwari, Director, Upstox. 

«The T+1 settlement cycle will provide investors with more liquidity in the hands of the customer, enabling them to leverage investment opportunities even earlier. This new cycle has the potential to transform the stock market dynamics in its full-scale implementation, and further boost equity participation in the country,» Maheshwari added.

Starting 27 January, stocks from Reliance Industries to Tata Consultancy Services and Adani Enterprises – together comprising 80% of India’s equity market – will be settled on a ‘trade-plus-one-day’ timeline versus the earlier two-day process. 

T 1 means that market trade-related settlements will need to be cleared within one day of the actual transactions taking place.

The yearlong changeover gave market intermediaries time to prepare, Prashant Vagal, executive vice president at National Securities Depository Ltd, said.

The shift will boost operational efficiency as rolling of funds and stocks will be faster, said Suresh Shukla, joint president at Kotak Securities Ltd.

This last step in the transition will be closely watched by foreign investors who have expressed concern over timezone differences and consequent trade-matching failures. Many have said that faster settlement reduces counterparty risk and trading costs.

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