T+1 settlement cycle

India will follow China in implementing the one-day cycle, which will improve operational efficiency, speed up fund transfers, facilitate the delivery of shares, and make it easier for stock market participants.

About the T+1 settlement cycle:

• The T+1 settlement cycle requires that trade-related settlements be completed a day, or 24 hours after a transaction is completed.
• According to T+1, for instance, if a consumer purchased shares on Wednesday, they would be deposited to their demat account on Thursday.
• Up to 256 large-cap and top mid-cap equities, including those listed on the Nifty and Sensex, would be subject to the T+1 settlement.

Historical aspect:

• Stock markets used a weekly settlement schedule up until 2001.
• The markets then switched to a T+3 rolling settlement arrangement, and in 2003, to T+2.
• In spite of criticism from foreign investors, T+1 is being implemented. The T+1 system has not yet been adopted by the markets in the United States, United Kingdom, and the Eurozone.

Settlement in T+1 vs. T+2:

• In T+2, if an investor sells shares, the trade is settled in two working days (T+2), but the broker handling the transaction won't get paid until the third day and won't credit the investor's account until the fourth day.
• In reality, the investor won't receive their money for three days.
• In T+1, the trade is settled within one business day, and the investor receives their money the next day.
• The transition to T+1 won't necessitate significant operational or technical adjustments from market players, and it won't fracture and put the core clearing and settlement ecosystem at risk.

The benefit of this system:

• Faster fund transfers: By releasing the margins on T+1 day and allowing investors to get the monies in their bank accounts within 24 hours following the sale of shares, this will also help investors reduce their overall capital requirements.
• Safer markets: A T+1 settlement cycle shortens the time horizon while also reducing the amount of cash needed to collateralize the risk and free up money.
• Reduction in Unsettled Trades: By reducing the number of unresolved trades that are open at any given time by 50%, it also minimizes the exposure of the Clearing Corporation to unresolved trades.
• The window of time for a counterparty's bankruptcy or insolvency to affect the settlement of a trade is smaller the shorter the settlement cycle.
• Share delivery: If an investor sells a share in the T+1 format, they will receive a payment within a day, and the buyer will receive the shares in their demat account within the same day.
• Operational effectiveness: From a liquidity standpoint, the shorter transaction settlement cycle that is scheduled to be implemented bodes well for the Indian equity markets. The speedier rolling of money and stocks will increase operational efficiency.
• Systemic risk reduction: Shortening the settlement cycle will aid in this process.

Why are foreign investors opposed?

• Due to the fact that they operate in many locations, foreign investors encounter operational challenges.
• Time zone disparities, information flow procedures, and currency exchange challenges were additional problems.
• Under the T+1 system, it is challenging for foreign investors to hedge their net India exposure in dollar terms at the end of the day.