T+1 Settlement Cycle Comes Into Effect From January 27. What Does It Mean: Explained

Shares of about 200 of India’s biggest listed companies are set to move to T+1 settlement cycle. This will make India the second market after China to switch to the so-called T+1 system

The BSE and NSE, the two major stock exchanges in India, in November 2021 in a joint statement announced that they will implement the T+1 settlement cycle in a phased manner.

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Stock markets in India from Friday are embarking on a shorter settlement cycle or T+1 regime for the final list of large stocks. This move will help reduce margin requirements for clients and boost retail investment. Shares of about 200 of India’s biggest listed companies are set to move to T+1 settlement cycle. This will make India the second market after China to switch to the so-called T+1 system. On Friday, stocks from Reliance Industries to Tata Consultancy Services and Adani Enterprises — together comprising 80 per cent of the country’s equity market — will be settled on a ‘trade-plus-one-day’ timeline versus the earlier two-day process.

What is T+1 settlement?

T+1 (trade plus one) means that market trade-related settlements will need to be cleared within one day of the actual transactions taking place. Earlier, trades on the Indian stock exchanges are settled in two working days after the transaction is done (T+2).

The BSE and NSE, the two major stock exchanges in India, in November 2021 in a joint statement announced that they will implement the T+1 settlement cycle in a phased manner, starting February 25, 2022, with the bottom 100 stocks in terms of market value. Thereafter, 500 stocks were added based on the same market value criteria from the last Friday of March and so on every following month.

Stocks moving to the T+1 cycle?

All securities, including stocks, debt instruments, REITs, InvITs, and ETFs, which were earlier under the T+2 settlement cycle, would transition to the T+1 trade settlement cycle from Friday (January 27). The stocks that are migrating to the T+1 cycle are part of the Nifty 50 and Sensex. The list includes the likes of Reliance Industries, Tata Motors, Infosys, and State Bank of India, as well as midcap new-age tech stocks like PB Fintech, Delhivery, FSN E-Commerce or Nykaa, and One97 Communications or Paytm.

Benefits of T+1 cycle?

According to a SEBI discussion paper, a shorter settlement cycle not only reduces the risk prevalent in the system but also reduces and frees up the capital required to collateralise that risk. Besides, it will also lead to savings in operational costs as many processes will move from manual to automation mode.

From January 27 onwards, all trades in the equity cash segment (including Futures and Options on stocks) will be conducted on a T+1 basis. The final batch of securities, including stocks, ETFs, debt instruments, real estate investment trusts (REITs) and infrastructure investment trusts ( InvITs), will be moving to the T+1 settlement cycle from Friday, information available with the Zerodha website showed.

This is not the first time that markets regulator Sebi has chosen to shorten the settlement cycle. Earlier in 2002, the capital markets regulator had cut the number of days in the settlement cycle from T+5 days to T+3 days, and then in 2003, it was reduced to T+2 days.

Market experts believe that the T+1 settlement system will allow the cycle of money to move faster without waiting for an extra day.

What the experts have to say

Upside AI co-founder Atanuu Agarrwal said most markets around the world function on a T+2 basis. T+1 settlement puts India ahead of even the US, which is the pre-eminent destination when comes to capital markets.  "This is a fantastic milestone and another feather in the cap of India's financial ecosystem. These changes will definitely bolster overall liquidity due to faster rollover and are a big positive for all stakeholders i.e., issuers, investors, and intermediaries," he added.

"As Indian markets embark on T+1 for the final list of large stocks from 27th January, the question is if the systems are robust enough. In fact, the T+1 system was enabled by solid strides in technology. Rapid bank transfers, the rise of UPI as a payment mechanism, superior bandwidth and the predominance of online and app-based trading have helped this cause," Gagan Singla, MD at blinkX, which is an initiative by JM Financial, said.

The shift from physical to digital in broking communication, dissemination, execution and risk management has largely catalysed the progression to T+1, he added. 

Suresh Shukla, joint president at Kotak Securities Ltd, said the shift will boost operational efficiency as rolling of funds and stocks will be faster.

The US Securities And Exchange Commission (SEC) has sought stakeholder views on moving to a one-day settlement cycle and an industry body in Europe is discussing the same. “Shortening the settlement cycle should reduce the amount of margin that counterparties would need to post with clearinghouses,” SEC Chairperson Gary Gensler said. "As the old saying goes, time is money," he noted.