Indian Stock Exchanges moves to T+1 Settlement
With effect from 27th January 2023 NSE and BSE have moved to T+1 settlement from T+2 settlement. All large-cap and blue-chip Companies were switched to the T+1 system on January 27. To determine the settlement day, all intervening holidays including bank holidays, Stock exchange holidays, Saturdays, and Sundays are excluded. As per the press release by the exchanges starting Feb 25th, 2023, 100 stocks from lowest market cap will move to the T+1 settlement cycle on both exchanges simultaneously. From March 2023, 500 stocks ranked from lowest market cap will move to the T+1 settlement cycle.
Looking at the history of settlements in Indian exchanges, all scrips moved to rolling Settlement from December 2001 onwards. First settlements were on T+5 basis. T+5 was replaced with T+3 in April 2002 and then to T+2 in April 2003.
What is T+1 and T+2: When we buy or sell any security, there are two important aspects to it – the transaction date i.e. “T” and the settlement date. Therefore T+1, and T+2 refer to the settlement dates of security transactions that happen on a transaction date plus 1 day or 2 days. Settlement means the official transfer of shares to the buyer’s account and cash to the seller’s account. If the markets follow T+2 days settlement, i.e., settlement of funds and securities happens two business days after the order is executed. So, if one buys shares on Monday, they will be credited to his Demat account and consideration credited to seller’s account by Wednesday as per T+2 settlement. 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 settlements could help avert the default risk of pay-in and pay-out for such voluminous transactions.
Impact of T+1 settlement: This is another major milestone and India is a major market to achieve T+1 settlement ahead of the most advanced financial markets like US, Europe and Japan. This will have a positive impact on overall liquidity due to faster rollover which will benefit issuers, investors, and intermediaries. With the shortened settlement cycle of T+1, the market will have more liquidity, reduced risk of pay in and pay out defaults, lowering margin requirements, and availability of funds and securities which should have a positive impact on trading volumes. The volume of trading may increase as trading account margin is blocked for just one day. This move is expected to increase retail participation and investments in equity markets.
The T+1 settlement move is definitely, a good move in reducing the risk of non-payment or non-delivery of shares by the broker, also will provide liquidity to the investors as they get their funds 1 day earlier. This will result in increase in the market turnover and increased transactions which will benefit brokers also.
How intermediaries responded: There was some resistance from Foreign Portfolio Investors against T+1 Settlement. Since FPIs investing in India operate from different countries and time zones, this move will prove to be a challenge for them to get the necessary approvals for the stock transfers and complete procedures from their custodians and offices. For domestic brokers T+1 Settlement involves a high cost of changing their back and front office operations. To address these issues to some extent exchanges have decided to implement the same in a phased manner.
*The Author S. Prabhakar, is a Fellow member of the Institute of the Company Secretaries of India, Chartered Secretary from the UK, Lawyer, and Registered Insolvency Professional.
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