In India, trade settlement used to take place on a ‘T+2’ basis, meaning that the securities bought or sold by an investor will reflect in his/her demat account after 2 days. With the shorter trade settlement cycle in the Indian equity market set to be implemented in the last batch of 256 stocks this week, most experts expect the transition to be smooth given the phased implementation of the same by stock exchanges. With this last leg of implementation in index stocks and those traded in the derivatives market, India will move to a ‘T+1’ settlement from 27th January 2023.
What is a ‘T+1’ settlement?
This settlement cycle essentially means that a transaction on the back of any purchase or sale of securities will reflect the next day in the demat account of the investor.
How were trades settled earlier?
In India, trade settlement used to take place on a ‘T+2’ basis, meaning that the securities bought or sold by an investor will reflect in his/her demat account after 2 days.
When did Sebi change the rule?
In September 2021, the capital market regulator provided flexibility to exchanges to offer either ‘T+1’ or ‘T+2’ settlement, following requests from various stakeholders to shorten the settlement cycle.
Why did exchanges implement the ‘T+1’ in a phased manner?
A shift to a shorter settlement cycle required changes to the infrastructure of trading operations for brokers, and getting necessary approvals and procedural completions for foreign institutional investors who are trading from different countries in different time zones.
How did exchanges implement the ‘T+1’ cycle?
The first phase of implementation was in February 2022, in 100 stocks with the lowest market capitalization, and thereafter, gradually stocks were added month after month.
Which are the last batch of stocks to move to the ‘T+1’ cycle?
There are a total of 256 stocks in the last batch to move to the ‘T+1’ cycle. These include all the stocks that are part of the and , such as Reliance Industries (NS:), Infosys (NS:), Tata Motors (NS:), Dr. Reddy’s Laboratories, State Bank of India (NS:). It also includes major midcap stocks like Dabur India (NS:), Ambuja Cements (NS:), Tata Chemicals (NS:), PB Fintech (NS:), FSN E-Commerce, Delhivery (NS:), One97 Communications, among others.
Advantages of T+1 settlement
Reducing the number of days for settlement will help provide better liquidity to investors and thereby enhance trade and participation.
Risks of T+1 settlement
There could be challenges in settling the trades in case there are any downtimes for a bank or a large bank. Moreover, higher volatility in capital markets could pose a contagion risk to the ecosystem
What is the settlement cycle followed worldwide?
India will be the second largest market after China to implement the ‘T+1’ settlement cycle of stocks. Most international markets such as the US, Europe, and Japan are still under the ‘T+2’ settlement cycle.
This could be a blessing in disguise for the Traders with shorter time horizons. Continuously churning the funds is the key for some traders as well. Hence we feel the advantages outnumber the disadvantages so far prima facia.
Stay tuned for more updates… we shall update you on the forthcoming budget as well.