When the stock market was established, it used to take several days for the settlement of buying/selling shares. In 2003, the settlement system reduced the timeline from T+3 to T+2. Now, to further ease the system and make money transfer faster, SEBI has announced the start of an optional T+1 settlement system instead of T+2.
What's the T+1 Settlement System?
‘T’ is the date on which the trade is done. In T+ 1 settlement system, the buyer of the shares gets the delivery of the shares in two days from the date of its purchase, and the seller of the shares gets the funds in two days from the date of its selling. For example, if you bought Stock X shares today, the delivery of the shares in your demat account will happen in two days. You will be able to see the shares in your portfolio in two days.
Why T+1 Settlement?
This system will happen from January 1, 2022, onwards. T+1 settlement cycle is beneficial for both buyers and sellers because the transaction will be closed earlier. This is very useful for the investors who are buying the shares today and want to sell them urgently. According to a SEBI paper, a shortened cycle not only reduces settlement time but also reduces and frees up the capital required to collateralise that risk. T+1 also reduces the number of outstanding unsettled trades at any instant and thus decreases the unsettled exposure to Clearing Corporation by 50%.
This move is particularly beneficial for large volume traders and investors. One day earlier settlement will give them the liquidity and reduce the margin requirement. Therefore, the overall liquidity will increase in the stock market given the higher retail investors participation and surge of IPOs these days.
What Has SEBI Allowed?
SEBI has allowed stock exchanges to follow the T+1 system as an option in place of the T+2 system earlier. A stock exchange may choose to offer the T+1 settlement cycle on any of the scrips after giving at least one month’s advance notice to all stakeholders, including the public at large. Once done, it has to follow the T+1 settlement cycle for a minimum of six months.
FPIs Opposing The T+1 Settlement
Three offshore fund lobby groups have sent a joint letter to the SEBI Chairman Ajay Tyagi. They have stated that the implementation of the T+1 settlement does not give stakeholders enough time to identify and implement the operational process and procedures. Foreign investors will also find it difficult to hedge their net India exposure in dollar terms at the end of the day under the T+1 system. The organisations have further alleged that SEBI did not consult them on the new rules.
SEBI came up with the proposal of the T+1 settlement cycle on the request of market participants. The market regulator consulted the stock exchanges, clearing houses and few depositors before coming up with this option. Reducing the settlement cycle will only bring efficiency in the trading and protect investors’ interest. Furthermore, the T+1 settlement is optional. Stock exchanges will decide the scrips that will be applying this new rule. This new settlement cycle will make the process faster and easier for investors.
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