T+1 settlement to kick in from Feb 25. What it means for you and market

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Before Sebi introduced the T+2 settlement system in April 2003, India follow the T+3 settlement system, meaning it took three days for shares and money to be credited to the account. Now, with the T+1 settlement system, you can expect credit of shares and money within 24 hours.

NEW DELHI: National Stock Exchange and BSE are set to roll out the T+1 settlement rules from Friday, starting with select stocks and then gradually adding others to the fold. The system has been brought in despite reservations expressed by foreign investors.

Here is everything to know about it:

What is a settlement system?

The settlement marks the official transfer of shares to the buyer’s account and cash to the seller’s account. Indian stock exchanges currently follow T+2 days settlement i.e. settlement of funds & securities happens on two business days after the order is executed. For example, if you buy shares on Wednesday, it will be credited to your Demat account only by Friday.

Before Sebi introduced the T+2 settlement system in April 2003, India followed the T+3 settlement system, meaning it took three days for shares and money to be credited to the account. Now, with the T+1 settlement system, you can expect credit of shares and money within 24 hours.

Why is the T+1 settlement system brought in?

Sebi, when proposing the plan in September last year, said it was receiving requests from various stakeholders to shorten the settlement cycle. It then gave exchanges the option to implement the new settlement cycle or stick to the existing T+2 system.

In November of the same year, BSE and NSE in a joint statement said they will implement the new system in a phased manner from February 2022 onwards.

Which stocks will be coming under T+1 settlement?

Initially, on the last Friday of February, only 100 stocks that are placed at the bottom according to their market valuation will be placed under the new settlement cycle. Thereafter, 500 more stocks will be added every last Friday of subsequent months, until every stock is placed under the new settlement system.

Also Read: Get The Latest Stock Market Updates On Money Control

How will it impact you?

Unless you trade in penny stocks, it will have no immediate impact on you. However, in the next few months, as more names are brought under the new system, you will see a credit of funds and shares within a day.

“T+1 settlement system will shorten the settlement cycle by a day reducing the risk of pay-in/pay-out defaults, lower margin requirements and give investors more liquidity with the availability of funds and securities,” said Anupam Agal, Head Operations & Legal, Motilal Oswal Financial Services.

How will it impact the market?

The volume of trading may see an increase as your trading account margin will be blocked for just one day. It will increase retail participation and investments coming to equity markets, said Agal.

I trade in block deals only. Does this apply to me as well?

Yes. The Sebi proposal clearly mentions that the settlement option for security shall be applicable to all types of transactions in the security. If a security is placed under T+1 settlement on a stock exchange, the regular market deals, as well as block deals, will follow the T+1 settlement cycle.

Can exchanges move stocks back under T+2 settlement?

Theoretically, yes. Sebi said after opting for the T+1 settlement cycle for a scrip, stock exchanges shall have to mandatorily continue with the same for a minimum period of 6 months. Thereafter, in case they intend to switch back to the T+2 settlement cycle, they can do so by giving 1-month advance notice to the market.

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