Yes, physical settlement can occur. To ensure physical settlement of open F&O stock positions, maintaining the required F&O margins in either cash or pledged collateral is necessary.
In the scenario where you have no cash balance but sufficient collateral has been pledged, your open F&O stock positions can be physically settled to your demat account. However, your fund balance will turn negative by the amount of the physical delivery settlement value and associated charges.
Interest will be charged on the negative ledger balance until you add funds to your Zerodha account or sell the collateral/holdings in accordance with Zerodha's policy.