The Indian stock market is shifting to the world's fastest settlement cycle, T+1, from January 27 2023. This means that exchanges will settle all trades executed on the stock exchanges within one day of their execution.
The Securities and Exchange Board of India (SEBI) has recently announced this new move that will provide flexibility to stock exchanges to offer either a T+1 or T+2 settlement cycle. This move follows SEBI's circular dated February 06, 2003, which had previously shortened the settlement cycle from T+3 to T+2 from April 01, 2003. This change comes in response to requests from stakeholders for a further shortening of the settlement cycle.
SEBI's decision is expected to reduce settlement risk and provide greater efficiency and flexibility to the market. Organizations such as stock exchanges, brokers, custodians, clearing corporations, mutual funds, and other financial institutions should be aware of this change as it will affect their operations.
What is T+1 settlement, and how good is it for you?
T+1 settlement is a settlement cycle where a transaction is settled one day after the trade. For example, if an investor places an order to buy shares on a Monday, the transaction is settled on Tuesday, and the shares are transferred to the investor's demat account.
This change by SEBI is beneficial as it helps reduce the settlement risk and the settlement time of the transactions. This change will mean that all exchanges can move to the T+1 settlement cycle. This will reduce the time taken to settle transactions and help to reduce the risk of short delivery and associated penalties. This also enables investors to manage their portfolios more efficiently.
Organizations such as stock brokers, stock exchanges, custodians, market makers, depository participants, and custodial services should be aware of this change. These organizations must update their systems to comply with the new settlement cycle.
How did exchanges settle trades earlier?
Earlier the trade settlement took T+2 days. The difference between T+2 and T+1 transaction settlement is the amount of time it takes to settle. T+2 stands for trade date plus two days, while T+1 stands for trade date plus one day. This refers to the time between when a trade is executed and when it is settled, and the exchange confirms the ownership of the asset.
The new move of SEBI allowing exchanges to settle transactions in T+1 creates a positive impact by shortening the settlement cycle and reducing the risk of delayed settlement. It also reduces the amount of capital tied up in the settlement process and encourages more efficient use. This move also enables more liquidity in the market as investors can access their funds more quickly and trade more often. This can lead to more volume and activity in the markets, creating a more vibrant and efficient trading environment.
How to implement the changes?
The stock exchange can implement the change by giving advance notice of at least one month, regarding the change in the settlement cycle, to all stakeholders, including the public at large, and also disseminating the same on its website. After the notice period has passed, the stock exchange can offer the T+1 settlement cycle on any scrips.
The Stock Exchange must use the T+1 settlement cycle for a scrip for a minimum of 6 months. After that, if the Stock Exchange wishes to switch back to the T+2 settlement cycle, it must provide a 1-month advance notice to the market.
Phased manner implementation
Exchanges implemented the 'T+1' in a phased manner to give all stakeholders, including investors, brokers, and other market participants, time to adjust to the new system and to ensure that the market is prepared for the change. Additionally, by phasing in the change, exchanges can better monitor and address any issues that may arise from the transition.
