From 2022, stock exchanges, clearing organisations, and depositories will begin implementing a reduced equities trade settlement cycle. By January 27, 2023, the regime will have a complete transition to the next-day rolling settlement or T+1.
According to the plan, between February 2022 and January 2023, the T+1 settlement cycle will convert almost 5,300 stocks to the shortened cycle in 12 phases. The majority of large-cap corporations will make the switch in January 2023.
On September 7, the market regulator permitted exchanges to implement T+1. In April 2003, India’s Securities and Exchange Board reduced the settlement period from T+3 to T+2.
By July 29, over 2,500 equities from the BSE and 285 from the NSE will have been converted to T+1. The majority of companies included in indexes and account for almost 90% of trading volume on exchanges will trade on January 27, 2023.
Institutional investors such as foreign portfolio investors, mutual funds, AIFs, and other domestic institutions are unlikely to be impacted during the transition phase. The stock in transition is illiquid and ranks near the bottom of the market capitalisation rankings. Investors who trade penny stocks or illiquid stocks must guarantee that payouts occur at the end of the day for the next day’s delivery to occur.
Institutional investors will need to adjust their portfolios by July-August when stocks with a larger market cap and liquidity begin to enter T+1. In January 2023, all equities included in the major benchmark indices will enter T+1.
All listed stocks will be ordered in descending order based on their October 2021 daily market cap average. For companies listed on multiple exchanges, the market capitalisation will be determined using the price at the stock exchange with the highest volume of trade.
According to the ranking, the bottom 100 equities will be available for T+1 settlement on February 25. From March 2022, the following 500 stocks on the list will be available for introduction to T+1 on the last trading Friday of each month. If Friday is a holiday, the next trade day will be considered.
Any new stock registered after October will be included based on its market capitalisation, computed using the average market price of the first 30 days of trade. Along with the parent stock, preference shares, warrants, right entitlements, partially paid shares, and DVR shares will be converted to T+1.
Closed-end mutual funds, debt securities (including corporate bonds), sovereign gold bonds, government securities, Treasury bills and state development loans, REITs, InvITs, ETFs, and depository receipts, as well as all other existing securities, will be transitioned in conjunction with the final scheduled batch of securities.
The Securities and Exchanges Board of India (SEBI) campaigned to decrease the settlement cycle from T+3 to T+2 days in 2003. This shortened the time required for shares and money to be credited to investors’ accounts and injected much-needed liquidity into several stock exchanges.
And in light of the tremendous technological advancements made by stockbrokers, depository participants, stock exchanges, clearing organisations, and other entities, SEBI is now planning to implement the T+1 settlement cycle by February 2022.
Based on this trend, can this settlement cycle be further lowered to T+0 days in a few years? This is precisely the question we will answer in this post.
What is the current settlement cycle?
Putting aside intraday trading in stock markets, the Indian stock market is currently on a T+2 settlement cycle. This means that any shares purchased on a particular trading day will be credited to your demat account two business days later. Similarly, the proceeds from the sale of shares on a particular trading day are only available to you two business days after the transaction.
Establishment of the T+1 settlement cycle
While the T+2 settlement cycle has been the norm since 2003, India’s Securities and Exchange Board stated in September 2021 that it would be phased out in 2021.
The T+1 stock market settlement provision will be phased in over time, beginning with the bottom 100 stocks (by market capitalisation) listed on both stock exchanges. And starting in March 2022, the bottom 500 equities (by market capitalisation) will be shifted to the T+1 settlement cycle, followed by the remaining stocks in October 2022.
According to the T+1 settlement cycle, you will receive your shares and money within one business day of the transaction date. The elimination of a day from the settlement cycle is a significant step forward. It would significantly speed up the process of stock market settlements.
Is it possible to establish a T+0 settlement in Indian markets?
If the T+1 settlement proceeds successfully, would India ever see a T+0 stock market settlement? The answer to this question is far from straightforward.
While the shift from T+2 to T+1 may be a bit one-day reduction, it has far-reaching implications for all parties participating in the settlement process – stock brokers, depository participants, stock exchanges, and clearing firms.
This transition from T+2 to T+1 will likely put settlements’ speed and efficiency to the test. Considering this, aiming for a T+0 settlement, in which the shares and money are deposited to your accounts and immediately accessible for use, is unlikely to happen anytime soon.
Additionally, unlike bank transfers, which enable quick and same-day fund transfers because the asset being moved is the same across accounts, the same cannot be stated for stocks. The stock market involves exchanging securities and money between two parties, with several institutions acting as middlemen.
Ruling out T+0 settlements in the Indian markets may also be a mistake. Many investors were sceptical in 2003 when SEBI implemented T+2 settlements. However, as you can see, we’ve continued to follow the same cycle without incident.
Thus, a few decades ago, we may even observe T+0 settlement cycles in Indian markets. However, it is unknown how the T+1 cycle will be implemented for the time being.