After China, India will become the second country in the world to start the ‘trade-plus-one’ (T+1) settlement cycle in top listed securities from January 27, bringing operational efficiency, faster fund remittances, share delivery, and ease for stock market participants.
What’s the T+1 settlement plan?
The T+1 settlement cycle means that trade-related settlements must be done within a day, or 24 hours, of the completion of a transaction. For example, under T+1, if a customer bought shares on Wednesday, they would be credited to the customer’s demat account on Thursday. This is different from T+2, where they will be settled on Friday. As many as 256 large cap and top mid-cap stocks, including Nifty and Sensex stocks, will come under the T+1 settlement from Friday.
Until 2001, stock markets had a weekly settlement system. The markets then moved to a rolling settlement system of T+3, and then to T+2 in 2003. T+1 is being implemented despite opposition from foreign investors. The United States, United Kingdom and Eurozone markets are yet to move to the T+1 system.
What are the benefits of T+1?
In the T+1 format, if an investor sells a share, she will get the money within a day, and the buyer will get the shares in her demat account also within a day.
Subscriber Only Stories
“The shorter trade settlement cycle that is set to be implemented augurs well for the Indian equity markets from a liquidity perspective, and it shows how well we have grown on the digital journey to ensure seamless settlements within 24 hours,” said Ajay Menon, MD & CEO of Broking & Distribution at Motilal Oswal Financial Services.
This will also help investors in reducing the overall capital requirements with the margins getting released on T+1 day, and in getting the funds in the bank account within 24 hours of the sale of shares. The shift will boost operational efficiency as the rolling of funds and stocks will be faster, Menon said.
Will it also make markets safer?
According to a paper published by the Securities and Exchange Board of India (SEBI), a T+1 settlement cycle not only reduces the timeframe but also reduces and frees up capital required to collateralise that risk. A shortened settlement cycle also reduces the number of outstanding unsettled trades at any point of time, and thus decreases the unsettled exposure to Clearing Corporation by 50 per cent. The narrower the settlement cycle, the narrower is the time window for a counterparty insolvency/ bankruptcy to impact the settlement of a trade.
Further, the capital blocked in the system to cover the risk of trades will get proportionately reduced with the number of outstanding unsettled trades at any point of time. Systemic risk depends on the number of outstanding trades and concentration of risk at critical institutions such as CCPs, and becomes critical when this magnitude of outstanding transactions increases. Thus, in this era of increasing trade volumes, a shortened settlement cycle will help in reducing systemic risk, SEBI says.
Why are foreign investors opposed?
Foreign investors were against SEBI’s T+1 proposal, and had written to the regulator and the Finance Ministry about the operational issues faced by them, as they operate from different geographies. Among the issues raised by them were time zone difference, information flow process, and foreign exchange problems.
Foreign investors said they would also find it difficult to hedge their net India exposure in dollar terms at the end of the day under the T+1 system. In 2020, Sebi had deferred the plan to halve the trade settlement cycle to one day (T+1) following opposition from foreign investors.