India will become the first major economy to move to a T+1 market settlement cycle when it finally makes the transition on Friday, January 27.
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The Chinese market is currently partly T+1.
With the move, all stock settlements will be done the next day, making financial transactions faster in the stock market. Currently the market follows a T+2 settlement cycle, which means the investors receive shares or dividends as well as bonus shares in their accounts within two days after the transaction. T refers to the trading day. Starting January 27 all large-cap and blue-chip companies will switch to the T+1 system.
What is T+1 Settlement Cycle?
Settlement refers to the process in which funds and securities are transferred to and from the buyer and seller. The time needed to complete these transfers is known as the settlement cycle. Domestic stock markets, both NSE and BSE, currently follow the T+2 settlement cycle. This means that shares would be transferred to a Demat account within two days after the transaction and funds from selling a share would be available two days after completing the transaction.
A T+1 cycle will mean that transfers will be completed the very next day and result in shorter waiting times as well as reduced liquidity risks for traders and investors.
When was it first proposed?
The proposal for shorter settlement cycles came in around late 2021 and early 2022, nearly 19 years after the settlement cycle was last shortened. The Securities and Exchange Board of India (SEBI) introduced the changes in February 2022 in a phased manner, which finally culminated in January 2023. The settlement cycle was shortened in 12 phases.
Why was it done in a phased manner?
The phased introduction of the shorter settlement cycle was necessary in order to take care of technological and logistical challenges that would come while transferring securities to a shorter settlement cycle.
What were the concerns and who raised them?
The Association of National Exchanges Members of India (ANMI), a group of over 900 stockbrokers across the country, had earlier issued a letter to SEBI in which it raised several concerns with the T+1 settlement cycle. Among other factors, the letter stated that the change should not be implemented without addressing operational and technical challenges. Most of the brokers and trading houses had raised concerns over time required for technological upgradation and the cost over changing their back and front-office operations.
How has the trading cycle evolved in Indian stock markets?
SEBI introduced a rolling settlement cycle in July 2001. Prior to this all the settlements were being done on a fixed day- Fridays on BSE and Tuesdays on NSE. This system was riddled with many problems like poor delivery, excessive liquidity and frequent defaults. SEBI introduced the rolling settlement cycle after Demat accounts came into operation in 1996. Initially a T+5 settlement cycle was being followed, which meant settlements within 5 days from the trading day. In 2002 the market regulator shortened it to T+3 cycle and then to T+2 from April 2003, which is being followed till now.
Meanwhile, in an interview to CNBC-TV18, Nithin Kamath, Founder and CEO of Zerodha said, “It is quite phenomenal that how easily we have transitioned, over the last one year, into the T+1 settlements cycle without any issues. We are the first country in the world to completely go to T+1 across the entire market; China is T+1 in bits and pieces. So, kudos to SEBI and everyone who was behind making this happen.”
For more details, watch the accompanying video