T+1 settlement for Indian equities – All that you should know

The Indian stock markets have been buzzing for many days mostly on account of expectations from the upcoming budget. However, today the dominant news in the Indian stock markets is the shift of the final trench of stocks on the NSE and BSE from the T+2 settlement cycle to the T+1 settlement cycle. 

Here are all the details you need to know regarding the same and how will it impact the average investor or trader. 

Read More: Check out the entire list of stocks that will move to T+1 settlement in last tranch

What is the settlement cycle?

The settlement cycle of the Indian stock market before today was T+2 days. This meant that the investors would get the credit for the stock they purchased or any transfer of funds (sale of securities, etc.) on the second day after the transaction. The ‘T’ in the settlement cycle is the trading date or the transaction date. This is the starting point to be considered for any transaction in the stock markets. 

The revised settlement cycle of T+1 days was first proposed in 2021 and was implemented in a phased manner starting in February 2022. At that time the bottom 100 stocks with the lowest market capitalisation on NSE were placed under the T+1 settlement cycle. This was gradually upped by the next bottom 500 stocks to be transitioned on the last Friday of every month. Under this settlement cycle, traders and investors will get the credit of securities and the transfer of funds to their account within a day i.e., within 24 hours from the transaction date. 

On 27th January 2023, the final trench of stocks in the Futures and Options segment will be transitioned to the updates settlement cycle in a single batch rather than in two batches. This will bring all the stock traded on the Indian stock exchanges under a single settlement cycle of T+1 days from 27th January 2023.

Check out the entire list of stocks that moved to T+1 settlement on 27 Jan 2023.

What is the need for the revised settlement cycle?

India will be the second country after China to move to the T+1 settlement cycle while the majority of the international markets like the USA, Japan, and Europe still follow the T+2 settlement cycle. This move was implemented keeping in mind the improved infrastructure of the banking systems, especially backed by UPI, for the settlement of trades and on account of the increased participation of retail investors over the past couple of years. The revision of the settlement cycle is implemented with the following intentions,

• To increase the operational efficiency
• Speed up the remittances and credit of securities
• Reduce the risk of defaults in pay-in and pay-outs,
• Reduce the margin requirements for the traders
• Induce more liquidity in the market and further increase retail participation.
• Reducing the number of outstanding unsettled trades at any given point and thereby reducing the exposure to the Clearing Houses by 50%

How will the transition impact investors/traders and other participants?

This transition of the settlement cycle will have a huge impact on the investor/traders as they will get faster credit for their securities. Traders will also benefit as the duration of funds blocked for margin requirements will reduce which can ultimately reduce their capital requirements.

With equities moving into a shorter cycle, equity mutual funds and ETFs may also see a shorter settlement cycle from T+3 and T+2 respectively.  

The transition from the T+2 settlement cycle to the T+1 settlement cycle was heavily initially criticised by the intermediaries, brokers, and the FPIs (Foreign Portfolio investors). Their reasons for not favoring this settlement were the high cost and the time needed for their systems (front-office and back-office operations) to transition from the current cycle to the updated cycle.

 Therefore, SEBI proposed to introduce the updated settlement cycle in a phased manner that will give the intermediaries and the brokers sufficient time to update their systems and bring them in sync with the new format. 

FPIs, on the other hand, were against the implementation of the T+1 cycle citing issues related to the shortened settlement cycle that they would face on account of reasons like

• Different time zones
• Hassles of foreign exchange booking either late in the evening of the trading day or the early morning of the following day
• Hurdles in information flow
• Procedural hassles to get necessary approvals for stock transfers from their respective head offices, and custodians.

The final trench of the stocks to be moved to the updated cycle is the most crucial for the FPIs as it accounts for their maximum holdings. The markets are also seeing a huge outflow of the FPIs with Rs. 20,000 crores being accounted for this month already. However, as SEBI was committed to transitioning to the T+1 settlement cycle, FPIs are now on board as well. 

Conclusion

India transitioned its settlement cycle from T+5 days until 2003 which was followed by T+3 till 2003 and T+2 days up until now. The new phase of the T+1 settlement cycle is expected to bring retail participation to new heights and is expected to increase the volume and liquidity in the stock markets. 

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