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What the new T+1 settlement process entails for investors and markets?

The T+1 settlement would benefit the retail investors at large and immense liquidity in the market is expected as the T+1 settlement cycle would kick in.

February 24, 2022 / 07:23 AM IST

The stock exchanges in India will be implementing a new T+1 settlement process in phases beginning tomorrow.

What is a settlement?

In the stock market, for a trade to happen, there is always a buyer and a seller. So, when a person buys a certain number of shares, there is another trader who is willing to sell those shares. The settlement cycle is said to be completed only when the buyer receives the shares and the seller receives the money.

In India, the settlement process is based on rolling settlement principle of T+2 as of now.

As per the rolling settlement principle, the trade is settled in days following the trade. So a T+2 type of settlement indicate that deals are closed after the second working day. So, if a trade is executed on a Wednesday, it will be closed on the following Friday. But, if the trade is carried out on a Friday, the trader must pay the broker on Friday itself, but the shares will be deposited in his account only the following Tuesday.


T+1 settlement

Earlier in 2003, the regulator had shortened the settlement cycle from T+3 rolling settlement to T+2. Now, the regulator plans to reduce it further to T+1 settlement cycle for completion of share transactions to enhance market liquidity.

The Stock Exchanges have informed of implementing T+1 settlement cycle in a phased manner, starting with bottom 100 stocks in terms of market value, from February 25. Thereafter, 500 more stocks will be added based on the same criteria of market value from the last Friday of March 2022 and every following month thereafter. Those transacting in stocks falling under T+1 settlement cycle will get their money or shares delivered in less than 24 hours.

“This will make India the first country in the world to go for such a quick settlement putting us ahead of the US. The T+1 settlement was proposed recently with implementation timelines of 24 months by the the Securities Exchange Commission (SEC),” said Manoj Dalmia Founder and Director, Proficient Equities Limited.

 What it brings for investors and markets

“T+1 should be a good move, making settlement cycle shorter, reducing margin requirement for clients with margin blocked for just one day, thereby increasing retail participation and investments coming to the equity markets,” said Anupam Agal, Head Operations and Legal, Motilal Oswal Financial Services.

The T+1 settlement would benefit the retail investors at large and immense liquidity in the market is expected as the T+1 settlement cycle would kick in.

“This is a positive signal for the markets as it encompasses faster execution of trade and utmost competence. This would also reduce the settlement cycle for clients with margin requirements further boosting trade participation in the markets,” said Sonam Srivastava, Founder, Wright Research.

The new process will reduce the risk of defaults at the end of both the parties.

“This will reduce the risks of default in payments and non-transfer of shares and will also bring in more clarity to investors on transition when shares go ex-dividend, ex-rights etc,” said Divam Sharma Co-founder of Green Portfolio.

This will also enhance investor participation and liquidity in instruments like ETF’s, gold bonds and debt funds, he added.

Now the onus will be on brokerages which will have to gear up their systems and operational processes to handle the settlement in a seamless manner with high availability and very less room for any outage.

“The process has to be fast and seamless since now the time for settlement would reduce , more thrust would be towards digital  payment of funds to payin of securities by customers and even the brokers” pointed Ashish Rathi, Whole Time Director, HDFC Securities.

“There is not much of impact since from 25th onwards only 83 securities listed on the BSE are going ahead with the T+1 settlement as the volumes and market cap in these securities are very negligible,” Rathi said.

Important companies with larger market cap will start moving into T+1 settlement at later stages by the time all the participants will be able to gear up and streamline their processes and systems to manage enormous volumes of trade.

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Gaurav Sharma
first published: Feb 24, 2022 07:11 am
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