Stock exchanges, clearing corporations, and depositories, collectively known as market infrastructure companies, have created a roadmap to implement the new T+1 settlement cycle mechanism.
The Securities and Exchange Board of India (SEBI) permitted stock exchanges to introduce the T+1 settlement cycle on September 7. It allowed exchanges to offer T+1 day settlement cycle from the beginning of the next calendar year.
Currently, the markets follow a T+2 day settlement cycle, where settlements take place two working days after the transaction takes place on the market.
Currently, after a trade is executed, the broker receives money two days after the transaction, and the investor receives the money only after three days.
In contrast, a T+1 settlement mechanism would allow trade settlements to be cleared within one day of the transaction.
The new settlement mechanism will be implemented in a phased manner, where the bottom 100 stocks will be brought into the T+1 fold first in February 2022, followed by the next bottom 500 stocks on the last Friday of each month.
According to SEBI guidelines, after an exchange brings a stock into the T+1 settlement fold, it must remain there for six months before it can be taken back into the T+2 settlement mechanism, if required.
According to SEBI, T+1 day settlement can be advantageous to market participants as it would reduce the capital requirement and reduce the time required for settlements.
As a result, the market’s liquidity and turnover could see a boost. The mechanism would reduce the number of outstanding unsettled trades, which in turn would reduce the unsettled exposure of the Clearing Corporation of India.
Therefore, the T+1 cycle can help reduce systemic risk, according to SEBI. The transition to a T+1 settlement cycle will not require additional investments or large overhauls by market participants.
Brokers have supported the move, as shorter settlement cycles could drive up trading volumes and client numbers as more people begin trading on the markets.
Foreign investors, however, have opposed the move citing issues while trading across different geographies. These issues include different time zone, exposure hedging, and foreign exchange issues that these investors could face.
This particular issue had led SEBI to delay the implementation of T+1 settlement in 2020. Foreign Portfolio Investors (FPIs) account for 40 per cent of market volumes, making them an important stakeholder in the ecosystem.
FPIs had asked SEBI for an extension to test new systems before moving on to the T+1 cycle.
Along with common equity shares, other financial securities traded on the exchanges, such as warrants, preference shares, securities with differential voting rights and other would be included in the T+1 settlement mechanism.
The settlement time has come down from T+3 in 2003 to T+2 currently. Moreover, market infrastructure companies across the world are attempting to shorten the settlement period from the current T+2 settlement period — currently practised all over the world.
The US markets, too, are looking to transition to a T+1 cycle by 2023.
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