According to stock market analysts, the T1 settlement cycle in India starting on Friday would assure faster settlement and faster liquidity for investors. 

T1 settlement cycle in India: Have you ever noticed that you must wait two days after buying or selling a stock, bond, or mutual fund for it to appear in your Demat account or  in your account? So, from taking two days to complete, or T + Day Settlement, it will now take just one day, or T + 1. Thanks to a circular released by the Security Exchange Board of India (SEBI), stock exchanges now have the freedom to offer T+1 cycles for stocks. According to the circular, shares may be credited as early as the following day (T+1). Do you still need clarification on what “T+1 Settlement” means, or do you want to learn more about its past? Well, let’s discuss this.

Indian Trade Settlement History

T1 settlement cycle in India: Initially, the Bombay Stock Exchange’s trading settlements (i.e., the delivery and payment of shares and stocks) took place only between Monday and Thursday. And Fridays were the day for final Settlement.

The physical flow of paper was how this settlement was made. By providing the shares to the buyer and paying the seller, the exchanges are utilised to conclude the trade. Additionally, the seller (the corporation) must physically transfer the securities to the final buyer.

The National Stock Exchange (NSE), which entered the market with screen-based trading supported by technology, brought about a number of changes to the trading world, particularly in India. Additionally, the NSE began its settlement cycle on specified days only, with Wednesdays serving as settlement days. Later, they shifted this to Tuesdays.

T1 settlement cycle in India: Because traders and other market participants could purchase and sell without having to make an immediate payment, this weekly settlement method increased market liquidity and eventually encouraged speculative activities in the cash market. This led to the wildly infamous Harshad Mehta scam.

This speculative aspect of trading highlighted system flaws, including default risks, and frequently prolonged the settlement cycle due to a lack of cash or scrip.

The Harshad Mehta scam served as a case study for the first revolution and to fix the settlement side flaws in the securities markets. In July 2001, the SEBI established rolling settlement in an effort to lessen the risk connected with the so-called fixed-day settlement system. At the conclusion of the trading day, now referred to as “T,” the settlement procedure for a trade contract starts.

It was first established for limited scrips on a T+5 basis (in 5 days following the date of trade) before being gradually expanded to other scrips.

From December 2001 onward, all scrips transitioned to rolling settlement. In April 2002, T+5 was replaced with T+3, and in April 2003, T+2 took its place.

What are T, T+1, T+2, and T+3 day settlements?

There are two important factors to consider when buying or selling a stock, bond, or other security: the transaction date, or T, and the settlement date. The terms T+1, T+2, and T+3 therefore stand for the settlement dates of securities transactions that occur on a transaction date plus one day, two days, and three days, respectively.

The transaction date, as the name suggests, is the precise day when the transaction was completed. For instance, if you purchase 50 shares today, T, the date of today becomes the transaction date. This date will always be the day that you completed the transaction, therefore, it never changes.

Why Delay Actual Settlement?

Security transactions used to be manually completed in the past as opposed to today’s electronic transactions, and we are now moving towards blockchain. Returning to the subject, investors had to wait for the delivery of their stock, bond, or security, which was in the form of a physical certificate, and the payment only took place after getting the physical certificate. Market regulators had to establish a cutoff period during which the entire trading transaction must be settled because delivery schedules vary and prices have a tendency to change.

Initially, the stock settlement date was T + 5, or five business days following the transaction date. Up until recently, when T+3 was chosen as the overall settlement, Thanks to modern technology and computerised trading, it is now T+2, or two business days following the transaction date.

Why not use instant settlement or T+0?

T1 settlement cycle in India: In today’s environment, where UPI powers nearly 4 billion bank transfers each month that are all quickly resolved, the topic of why we can’t have an instant settlement keeps coming up. A standard banking transaction involves a rapid transfer of funds from one account to another; this is substantially dissimilar. Here, both cash and stocks are at stake (stocks come with certain shareholder rights, and typically, stocks can’t be settled because of intraday trade).

If you look closely, intraday traders—those who frequently purchase and sell equities without actually accepting or delivering delivery—are responsible for the majority of trading volumes on stock exchanges throughout the world. These intraday traders typically close out their positions before the end of the trading day, thus the responsibility to deliver the stock will eventually fall on someone who owns it. “While rapid settlement is unattainable, even T+0 is exceedingly difficult considering the time required for brokers to crystallise the obligations and then clearing organisations to settle,” said Mr. Nithin Kamath, the founder of Zerodha, in response to a question about T+1.

When did Sebi change the rules?

Following proposals from numerous stakeholders to reduce the settlement period, the capital market authority gave freedom to exchanges in September 2021 so that they might offer either “T+1” or “T+2” settlement.

Foreign Portfolio Investors (FPIs) resisted the T+1 Settlement’s implementation with a lot of vigor. It can be difficult for FPIs to obtain the required approvals for the stock transfers and complete procedures from their separate custodians or head offices because they invest in India from different countries and time zones. They might see this as a real-time stock and money transfer mechanism.

Domestic brokers argued against it because adjusting their back and front office operations for the new T+1 settlement would be expensive. They both sought more time, so SEBI and the exchanges decided on a phased approach.

How was the “T+1” cycle implemented by exchanges?

The 100 stocks with the lowest market capitalization made up the first phase of implementation in February 2022, and then stocks were steadily added month after month.

Which stocks made the transition to the “T+1” cycle last?

T1 settlement cycle in India: The final batch of equities to transition to the “T+1” cycle contains 256 stocks in total. These comprise all of the equities that make up the Nifty 50 and Sensex, including State Bank of India, Reliance Industries, Infosys, Tata Motors, and Dr. Reddy’s Laboratories. A few notable examples of big midcap stocks are Dabur India, Ambuja Cements, Tata Chemicals, PB Fintech, FSN E-Commerce, Delhivery, and One97 Communications.

Advantages of T+1 settlement

Reducing the number of settlement days will allow investors to have more liquidity, which will improve trade and participation.

Risks of T+1 settlement 

In the event that a bank or a sizable bank experiences any outage, there may be difficulties in settling the trades. Moreover, increased market volatility could increase the likelihood of an ecosystem-wide contagion.

What settlement cycle is followed globally? 

After China, India will be the second-largest market to adopt the “T+1” settlement cycle for stocks. The majority of global markets, including those in the US, Europe, and Japan, continue to operate on a “T+2” settlement cycle.

How the T1 settlement cycle in India may benefit stock market investors

Beginning on January 27, 2023, the Indian stock market will use a shorter trading settlement cycle. With this deployment, shares purchased or sold starting on Friday will appear in a person’s demat account one day later. The implementation will start once all Nifty 50 and Sensex equities, including Reliance Industries Ltd. (RIL), Tata Motors, State Bank of India (SBI), Infosys, etc., have been added to the T+1 settlement system.

The founder of Green Portfolio, a SEBI-registered supplier of PMS, Divam Sharma, highlighted the direct impact of the T+1 settlement cycle on stock market participants by saying, “The T+1 settlement cycle should increase trading volumes since funds will roll over more quickly if it is implemented.” Investors will have faster liquidity thanks to speedier settlement, which should give equity investments an advantage over other asset classes.”

BTST push to cash segment

According to a source, T+1 settlement in India can benefit equity investors because: “the capacity to reinvest in the direct equity market is anticipated to increase after the implementation of T+1 day settlement as one would have money transferred within one day of profit booking.” Earlier, because of the T+2 settlement period, it happened after two days of profit booking.

T+1 settlement may cause an increase in intraday or BTST (Buy today and sell today) stock trading as some investors with conservative risk tolerance may switch to the cash market from futures and option trading. Therefore, those with a limited tolerance for risk can also participate in BTST trading via the cash section.”

A source from MNS commented on how BTST trades in cash would be safer compared to the F&O segment: “BTST calls are extremely risky in the F&O segment, and one must close out their position after a certain amount of time, whereas in the cash segment, one can hold the position for as long as they can, or more specifically, until their stop loss doesn’t trigger.” “Trading in the cash segment will spare traders the need to square off losing positions and roll over into subsequent series while incurring extra brokerage and taxes.”

“Equity mutual funds had a T+3 settlement cycle during the T+2 settlement in the Indian stock market, whereas ETFs had a T+2 settlement cycle.” “A statement about the settlement cycle for equity mutual funds and ETFs can be anticipated soon following the implementation of T+1 settlement in the Indian stock market.”

What happens to stocks bought today as the T+1 settlement cycle begins?

Any of these stocks purchased on Wednesday, January 25, 2023, won’t be available for sale on Friday, January 27, 2023, due to the danger of short delivery and the ensuing auction penalty, which may be up to 20%, as a result of a change in the settlement cycle. According to Bengaluru-based brokerage firm Zerodha’s blog, they will be finalised by the exchange on Monday in accordance with the previous T+2 settlement cycle and will be available for sale on Monday.

The equities purchased on January 27, 2023, will be sellable on Monday after being settled according to their new settlement cycle, T+1. The proceeds from the sale of these T1-settled stocks will be available for withdrawal starting the very following day that is on T+1

On January 27, all large-cap and blue-chip corporations will transition to the T+1 system. T+1 denotes that settlements for market trades must be completed within one day of the transactions themselves.

“Instead of two separate batches, all equities on which futures contracts are offered will be converted to T+1 settlement in January 2023, in order to improve operational efficiency and make things easier for market players.” Exchanges will therefore update the initial timeline for switching equities to T+1 settlement and publish a circular outlining the list of stocks that will be switched in December 2022 and January 2023, according to a SEBI circular.

FAQs-

1. T1 Settlement: What Does It Mean?

T+1 denotes that a transaction must be settled by Tuesday if it happens on a Monday. In the same way, T + 3 dictates that, barring any vacations, a transaction that happens on a Monday must be completed by Thursday.

2. Has the T1 settlement started in India?

The Securities and Exchange Board of India (SEBI) authorised stock exchanges to begin utilising the T+1 settlement cycle as of September 7, 2021, with effect from January 1, 2022.

3. What is the T+ settlement?

Settlement takes place for the majority of stock trades T + 2 days after the day the order executes (trade date plus two days). As an illustration, if you placed an order on Monday, it would normally settle on Wednesday.

4. Can I sell my shares in T1?

Quick trade, often known as BTST (Buy Today, Sell Tomorrow) or ATST (Acquire Today, Sell Tomorrow), is the practise of selling shares purchased the previous day on the T+1 day (Acquire Today, Sell Tomorrow).