The all-new T+1 settlement rule is set to roll out from 25 February 2022 in a proper phased manner. It will be introduced in both the Bombay Stock Exchange and the National Stock Exchange and will begin with the bottom 100 stocks ranked according to their market capitalization in descending order. Earlier, SEBI cut down the cycle of settlement from T+3 to T+2 days in 2003, but this rule will further shorten the settlement time, which will improve the market liquidity.
Know About The Settlement Cycle
The settlement cycle throws light on the settlement of securities and funds officially to the buyers’ and sellers’ accounts, respectively. At present, the Indian stock exchanges are following the T+2 settlement rules, where the cycle takes two business days to complete after the trade is executed. In other words, if an order is executed on Monday (trade date), then the transfer of securities and funds to the respective accounts will happen after two days, i.e. on Wednesday.
The Indian stock exchanges used the T+3 settlement rule until the T+2 (trade plus 2 days) rule in 2003. Now, the regulators have decided to shorten the settlement cycle further, which means the share transactions will be completed within one stipulated business day.
Implementation of the Latest T+1 Settlement Cycle
As indicated, the regulators will implement this new settlement cycle in a phased manner from 25 February 2022. This move will reduce the time between the order execution date (trade date) and the settlement date. The cycle will start with 100 stocks with the lowest market value. Then, further addition of 500 stocks will take place upon the same criteria of market value from the final Friday of the month of March this year. The same will continue for every subsequent month.
As stated in last year’s circular of stock exchanges, a descending order must be maintained for every stock. It must be based on the calculated average market capitalisation for October 2021. The market capitalisation must be calculated keeping the price of a stock with the highest trading volume across stock exchanges in mind.
How Will the T+1 Rule Benefit the Investors?
People transacting in stocks that fall under the new settlement cycle, i.e. T+1, will have their shares or funds delivered within a day or 24 hours. Thus this system, along with shortening the settlement time, will also reduce the risks involved with pay-in or pay-out defaults. It further lowers the required margins and provides better liquidity to the investors with increased availability of securities and funds. This, in turn, can increase retail participation and investments coming to equity markets.
This is evident that the introduction of the T+1 settlement system looks into the interest of the investors and reduces the risks involved with transactions. Furthermore, it encourages the stakeholders, including exchanges, brokers, clearing corporations and exchanges, to upgrade their infrastructure and technology. This will help make the operational systems collaborate with each other rather seamlessly and complete the settlement cycles at a more incredible speed. With the margin requirement of clients blocked for a day, it calls for increased participation from the retail investors, thus bringing a lot of liquidity into the stock markets.
Frequently Asked Questions
What is the T1 rule?
The T+1 rule states that settlement of funds and securities should be completed in less than 24 hours of the trade date.
Can I sell shares on T1 day?
An individual can sell shares on T+1 day bought the previous day, which is known as quick trade or more commonly called BTST (Buy Today, Sell Tomorrow) or ATST (Acquire Today, Sell Tomorrow). But these shares are not in one’s Demat account, so if indulging in selling the shares, you should know the market risk it brings along with it.
What is the T1 settlement cycle?
The T+1 settlement cycle deals with the market trade-related settlements like the transaction of funds and securities to respective accounts of buyers and sellers in less than 24 hours from the trade time and date.
Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.