Dalal Street: Decoded: T+1 settlement cycle from Friday. Here’s what changes for Dalal Street

With the last leg of implementation in index stocks and those traded in the derivatives market, India will move to ‘T+1’ settlement from January 27.

Here’s summarising the “what, where, why, how, and so what” of the new settlement cycle:

What is ‘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 a period of 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 capitalisation, and thereafter, gradually stocks were added month after month.

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.

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