SEBI implemented T+1 settlement cycle on an experimental basis

T+1 settlement

For the markets, the Securities and Exchange Board of India (SEBI) has implemented an optional T+1 settlement period. T+1 denotes that settlements must be completed within one day after the transaction’s completion.

The stock exchanges must decide whether they wish to opt for the short trade cycle for any of the listed stocks, according to the regulator. This can be done after providing all stakeholders a month’s notice.

Domestic investors should gain from a changeover to the T+1 settlement cycle since it will increase market liquidity and trade turnover while lowering settlement risk and broker defaults. Due to the time zone difference, foreign portfolio investors (FPIs) are projected to have significant operational hurdles in shifting to the new regime, particularly for US and European investors.

“SEBI has received demands from a variety of parties to cut the settlement cycle even more. Following consultations with stock exchanges, clearing firms, and depositories, it was decided to give stock exchanges the option of offering a T+1 or T+2 settlement cycle“, on Tuesday, the regulator issued a statement.

The circular’s provisions will take effect on January 1, 2022. Most major stock exchanges settle trades within two days. Taiwan has returned to the T+2 cycle after switching to T+1 settlement. Because all of the money now comes in on a realised basis, domestic investors will be in favour of switching to the T+1 system. Offshore investors, on the other hand, will have a problem.

Timelines being shortened

• After giving market participants one month’s notice, exchanges might opt for a shortened settlement cycle for any of the listed scrips.
• Domestic investors will gain from the T+1 settlement cycle since it will increase market liquidity and trading volume.
• Its goal is to lower the likelihood of settlement failures and broker defaults.
• Because of the time zone difference, US and European investors may encounter significant operational hurdles when implementing T+1.
• It will be difficult for global banks and FPIs to meet their funding responsibilities.
• For the same scrip, two different settlement periods on different exchanges could result in a transfer of domestic liquidity from one market to the other.

Further Implications

The exchanges may try to transfer 5, 10, or 15 scrips outside of the important benchmark indices like the Nifty 50 and the Sensex to the T+1 cycle first. FPIs are the most important aspect of Indian markets, and changing the index stocks could be too dangerous if cash becomes scarce.

The stock exchange will be required to continue using the T+1 settlement cycle for a minimum of six months after choosing it for a scrip. Following that, if the exchange wishes to return to the T+2 settlement cycle, it will notify the market one month ahead of time. The minimum notice period will apply to any subsequent switch. Between T+1 and T+2 settlements, there will be no netting.

For the same scrip, two different settlement periods on different exchanges could result in a transfer of domestic liquidity from one market to the other. If the RIL scrip is traded on the NSE under T+1 but on the BSE under T+2, a domestic institutional investor who prefers the T+1 cycle may trade the scrip on the former.

Most global banks and FPIs would struggle to meet fund responsibilities, and there may be operational anarchy. A market transition to T+1 would necessitate significant, coordinated, and costly structural changes to the settlement process, such as technological advancements and real-time/near real-time trade processing, all of which would limit and delay the realisation of the expected risk-reduction benefits of shorter settlement cycles.

Frequently Asked Questions

Q1. What does T + 2 settlement imply?

In India’s stock markets, the T+2 settlement cycle is used. This means that the entire trade life cycle—from start to settlement—takes two days.

Q2. Why does settling a trade take two days?

Settlement dates can be traced back to trading techniques that predate the contemporary computerised stock market. A stock deal used to be completed by a buyer and a seller who had three days to provide the securities as well as the money needed to complete the transaction.