The market regulator Securities and Exchange Board of India has rolled out an option of T+1 trade settlement to the exchanges, currently all exchanges follow the T+2 trade settlement cycle in India. Sebi extended this option after a lot of requests to shorten the trade cycle were made by market participants and various stakeholder. Currently, developed country like US follows the T+2 settlement cycle for equities, corporate bonds, municipal bonds, unit investment trust (UIT) and T+0 or T+1 for Money Market Instruments and Government Securities.
“SEBI has been receiving requests from various stakeholders to further shorten the settlement cycle. Based on discussions with Market Infrastructure Institutions (Stock Exchanges, Clearing Corporations and Depositories), it has been decided to provide flexibility to Stock Exchanges to offer either T+1 or T+2 settlement cycle,” the press release said.
Earlier, the market regulator shortened the trade settlement cycle from T+3 to T+2 way back in 2003. As of now this option of T+1 settlement cycle is optional and any stock exchange can choose to offer T+1 settlement cycle on any of the scrips after giving one month notice period. “After opting for T+1 settlement cycle for a scrip, the Stock Exchange shall have to mandatorily continue with the same for a minimum period of 6 months. Thereafter, in case, the Stock Exchange intends to switch back to the T+2 settlement cycle, it shall do so by giving 1-month advance notice to the market,” the press release read.
Simply put, the T+1 settlement cycle means after buying shares, the shares will be credited in the demat account just a day after the trade day. In the case of a sale transaction, the money would be credited the next day. The earlier the same thing used to happen in 2 days. The idea for embracing T+1 was first mooted in a discussion paper in 2013. Back then, the proposal had to grapple with many challenges from both foreign and domestic investors. In 2020, the Securities Industry and Financial Markets Association (Asifma) had written a letter to the market watchdog Securities and Exchange Board of India (Sebi), highlighting the operational difficulties for overseas investors if the settlement cycle is halved to T+1.
The association said that since working hours in Europe and US were not aligned with those in APAC markets, the current T+2 market cycle was already effectively a T+1 settlement cycle. “US or European custodians will often set deadlines that are settlement date-1 (SD-1). Investors are required to arrange funding for their transactions and for pre-settlement matching during their daylight hours a day before the trades settle,” the note written to the regulator said. The letter written in 2020 also mentioned that China is the only major market that currently operates on a settlement cycle of T0 or T+1. SEBI allows T+1 settlement for stocks. We are now amongst the first few countries in the world to allow this. So when you buy you can get stock to your Demat or get funds for the stock sold on the next day (T+1) instead of 2 days (T+2) currently.
“SEBI allows T+1 settlement for stocks. We are now amongst the first few countries in the world to allow this. So when you buy you can get stock to your Demat or get funds for the stock sold on the next day (T+1) instead of 2 days (T+2) currently,” Nitin Kamath, CEO of Zerodha said.
The market watchdog in the circular also asked Stock Exchanges, Clearing Corporations and Depositories to take necessary steps to put in place proper systems and procedures for smooth introduction of T+1 settlement cycle on optional basis, including necessary amendments to the relevant bye-laws, rules and regulations.
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