Explained: Here¡¯s What T+1 Settlement's Introduction Means For Investors In India¡¯s Stock Market

From January 2023, F&O settlement in the stock market will happen in a T+1 cycle. The NSE and BSE had already begun to roll out the T+1 settlement rules earlier this year in February, starting with select stocks and then gradually adding others to the fold.

To bring in operational efficiency and ease for market participants, it has now been decided that all stocks on which derivatives contracts are available will be transitioned to T+1 settlement in a single batch, i.e., in January 2023, instead of two separate batches," said a joint statement by the BSE (Bombay Stock Exchange), NSE (National Stock Exchange), and MSE (Metropolitan Stock Exchange) last month.

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But why is this change being introduced? How does it impact investors and the stock market? Let us simplify this for you.

What is a settlement system?

The settlement marks the official transfer of shares to the buyer's account and cash to the seller's account. Indian stock exchanges currently follow T+2 days settlement, i.e., settlement of funds and securities happens two business days after the order is executed. For example, if you buy shares on Wednesday, they will be credited to your Demat account only by Friday as per T+2 settlement.

Before SEBI introduced the T+2 settlement system in April 2003, as per an ET report, India followed the T+3 settlement system, meaning it took three days for shares and money to be credited to the account. Now, with the T+1 settlement system, you can expect credit for shares and money within 24 hours only.

Why was the T+1 settlement system brought in?

SEBI, when proposing the plan in September last year, said it was receiving requests from various stakeholders to shorten the settlement cycle. It then gave exchanges the option to implement the new settlement cycle or stick with the existing T+2 system.

In November of the same year, BSE and NSE, in a joint statement, said they will implement the new system in a phased manner from February 2022 onward.

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Which stocks will be coming under T+1 settlement?

Initially, only 100 stocks that were placed at the bottom according to their market valuation were placed under the new settlement cycle in February. Following that, 500 more stocks were added on the last Friday of each month until January 2023, when all stocks were introduced to the new settlement system.

How will it impact investors?

The T+1 settlement system will shorten the settlement cycle by a day, thus reducing the risk of pay-in/pay-out defaults, lowering margin requirements, and giving investors more liquidity with the availability of funds and securities.

How will it impact the market?

The volume of trading may increase as your trading account margin is blocked for just one day. This move is expected to increase retail participation and investments in equity markets.

Why is SEBI moving towards shorter settlement?

One of the main reasons is the exponential growth of retail investors. With the UPI gateway operating in real-time, SEBI believes that fund transfers from brokers to clients and vice versa should be seamless.

The Demat accounts of individual investors have more than doubled in a little over two years to cross the 10-crore mark in August 2022, from 4 crore in March 2020.

As more and more people enter the market, quick settlement could help avert the default risk of pay-in and pay-out for such voluminous transactions. Also, this will result in quick liquidity in the hands of investors, which can improve the overall trading atmosphere.

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Are brokers and intermediaries not happy with this change?

Initially, brokers and intermediaries were not prepared for it, as per the HBL report. T+1 settlement, according to brokers and intermediaries, comes at a high cost in terms of changing their back- and front-office operations. Both wanted more time to adapt to the changes. Besides, there is also concern among some brokers that this would eat away at liquidity. With SEBI opting for a phased roll-out, brokers and intermediaries have accepted the change.

Were foreign investors against the implementation?

Initially, foreign portfolio investors (FPIs) were against the implementation of the T+1 settlement. Since FPIs invest in India from different countries and time zones, they thought a shortened cycle could pose challenges in getting the necessary approvals for stock transfers and to complete procedures from their respective custodians or head offices.

However, with SEBI committed to introducing and continuing T+1, FPIs have reconciled to it.

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