Zerodha and T+1 settlement

Overview

T+1 settlement refers to a securities settlement cycle in which a transaction executed on a trading day (T) is settled – with securities delivered to the buyer and funds paid to the seller – by the end of the following trading day (T+1). India completed the transition from T+2 to T+1 settlement for equity shares on the NSE and BSE in January 2023, making it one of the first major markets globally to implement T+1 as the standard settlement cycle for all listed equities.

For Zerodha clients, the T+1 transition has practical implications for when sale proceeds become available as cash, when purchased shares arrive in the demat account, and how short-selling and intraday positions are managed.

Background: the move from T+2 to T+1

Before T+1, India operated on a T+2 settlement cycle for equities, meaning shares sold on Monday would be settled on Wednesday and the cash credited to the seller’s account (and available for withdrawal) by end of Wednesday. Shares bought on Monday would be delivered to the buyer’s demat account by end of Wednesday.

SEBI began examining T+1 as early as 2020, motivated by:

• Client protection: Faster settlement reduces the period during which both the buyer and seller carry counterparty risk. In T+2, if a broker defaults between T and T+2, the client’s funds or securities are at risk for two days.
• Capital efficiency: T+1 reduces the margin capital that clearing members must maintain to cover outstanding settlement obligations. With shorter settlement, the quantum of open settlement risk at any point is smaller.
• Alignment with global trends: While most major markets in 2020 were on T+2 (the US, Europe), there was industry discussion of moving to T+1 or even T+0. By implementing T+1 first, India positioned itself as a settlement efficiency leader.

SEBI mandated the T+1 transition in a phased manner. Beginning in February 2022, exchanges were permitted to offer T+1 settlement on an opt-in basis for specific stocks. The rollout started with the smallest-cap stocks (bottom of the market capitalisation ranking) and progressively moved up the market cap ladder. By January 2023, all equity shares on NSE and BSE were settled on T+1.

How T+1 works operationally

Under T+1 settlement, the settlement process for a buy or sell transaction proceeds as follows:

For a buy transaction

1. The client buys shares on day T through Kite.
2. By end of day T, the clearing corporation (NSCCL for NSE, ICCL for BSE) computes the net settlement obligation.
3. On T+1 (the next working day), the clearing corporation debits the buyer’s broker’s settlement account for the purchase consideration and credits the seller’s broker.
4. The shares are transferred from the seller’s demat account to the buyer’s demat account by end of T+1.
5. The shares appear in the buyer’s demat account and are available for sale from T+2 onwards (since delivery of recently credited shares may be subject to the exchange’s sell-before-delivery rules).

For a sell transaction

1. The client sells shares on day T.
2. Shares are debited from the client’s demat account (or blocked using the DDPI mechanism) on day T itself, ready for delivery on T+1.
3. Sale proceeds are credited to the client’s trading account at Zerodha on T+1 by end of day.
4. After the funds are received from the clearing corporation, Zerodha credits the amount to the client’s trading account ledger. Funds are available for withdrawal or for buying new securities from the evening of T+1.

Implications for Zerodha clients

Faster fund availability

The most immediately felt benefit of T+1 is that sale proceeds are available one day sooner than under T+2. A client who sells shares on Monday receives the proceeds by end of Tuesday rather than end of Wednesday. This improves capital velocity, particularly for clients who frequently redeploy sale proceeds into new purchases.

Early payout option

Zerodha offers an early payout facility for certain eligible clients. Under early payout, the sale proceeds from a transaction are credited to the client’s trading account earlier in the T+1 cycle, before the final clearing corporation settlement run. The early payout is funded by Zerodha from its own resources and subject to the standard early payout terms and fees.

Buying sold shares on T+0 (same-day turnaround)

Under T+1 settlement, a client who sells shares on day T receives delivery of those shares out of their account on T itself (or in the early part of T+1), and the sale proceeds are available by T+1. If the client simultaneously wants to buy the same or different shares with those proceeds, they can use the T+0 facility or wait for the T+1 proceeds to fund a purchase.

Short-selling and position limits

The T+1 cycle changes the mechanics of short-selling. A client who takes a naked short position in equities under T+1 must cover (buy back) the position by end of day T or arrange for delivery by T+1. Failure to deliver results in auction settlement by the clearing corporation, with financial penalties. The shorter cycle reduces the window for covering and increases the risk of inadvertent short delivery.

Impact on intraday (MIS) positions

Intraday positions (opened and closed within the same trading day) are not affected by the settlement cycle, since both the buy and sell legs of an intraday trade are netted within the same session. Settlement applies only to delivery-based (CNC) transactions that carry over to the next day.

Foreign portfolio investor considerations

The T+1 transition created some complications for foreign portfolio investors (FPIs), who typically operate across multiple time zones and whose back-office processes for currency conversion and settlement funding are calibrated to the settlement cycle. Under T+2, FPIs had two days to arrange INR to fund purchases or to convert INR sale proceeds back to foreign currency. T+1 compressed this window by one day.

SEBI addressed this through a framework allowing FPIs to use a same-day settlement mechanism or an optional T+1 window, depending on their setup. While this is primarily relevant to institutional market participants rather than retail clients, the FPI adjustment was one of the considerations in the phased rollout timeline.

Comparison with international markets

As of 2024, India’s T+1 settlement cycle for equities is among the fastest standard cycles globally for a major market. The United States SEC mandated T+1 settlement for US equities effective May 2024, bringing the US in line with India. The European Union and UK were still primarily on T+2 as of 2024, with T+1 studies underway.

References

• SEBI Circular, “Reduction of settlement cycle in the Indian securities market from T+2 to T+1,” 2021 and subsequent.
• NSE Circular, “Phased implementation of T+1 settlement cycle,” January 2022.
• BSE Circular, “T+1 settlement implementation schedule,” 2022.
• Zerodha Z-Connect Blog, “T+1 settlement: what changes for Zerodha clients,” Zerodha.com.
• SEBI, “FAQs on T+1 settlement rollout,” 2023.