Explained: T+1 settlement cycle implemented by the stock exchange

Anthony Fernandes
/ Categories: Knowledge, Fundamental
Explained: T+1 settlement cycle implemented by the stock exchange

At present, the stock exchange in India follows a ‘T+2’ rolling settlement cycle. The day the trade is executed is known as the ‘Trade Date’ and is signified as ‘T’. Every working day after the trade date is signified as T+1, T+2 and so on with weekends and stock exchange holidays not included. At present, the trades in India settle on T+2 days. 

For example, say you purchase 10 shares of company XYZ on Monday for Rs 1000 per share. The activity is performed on Monday and hence this is known as the trading day. It is signified by ‘T’. On the day ‘T’, Rs 10000 is deducted from your account and the broker provides you with a contract note as proof of transaction. This is followed by day T+1, wherein all the internal processing of the trade gets worked out. Lastly, on T+2, you will receive shares of XYZ in the DEMAT account at the end of the day.  

In the same example as above, had you sold your shares instead of buying, then the shares would get blocked in the demat account before T+2 day. On T+2 day, the proceeds from the same is credited to your trading account after deduction. 

Introduction of T+1 settlement 

The NSE and BSE have decided to implement the T+1 settlement system in a phased manner from February 25, 2022. The T+1 (trading+1 day) means the settlement of equity transactions in less than 24 hours from the day of the transaction. It will ensure same-day delivery of shares into the buyer’s account and money into the seller’s account and will make India the fastest stock market in the world to settle equity trades. For example, even if shares are bought or sold at around 3.25 pm (just before the market closes), payment and delivery of share settlement in most cases will happen the same day in the evening, thereby making the market more efficient. 

How is it being implemented? 

As declared by the NSE and BSE, the implementation of the T+1 settlement cycle will take place in a phased manner, starting with the bottom 100 stocks in terms of market value, from February 25, 2022. Thereafter, 500 more stocks will be added based on the same market value criteria from the last Friday of March 2022 and every following month. Those transacting in stocks falling under the T+1 settlement cycle will get their money or shares delivered in less than 24 hours. 

Why is it being done in a phased manner? 

Most large stock markets, like in the US, Europe, Japan, still follow the T+2 settlement cycle of trade settlement. India will become the first country in the world to go for a T+1 settlement. There was tremendous opposition from foreign portfolio investors (FPIs) against the implementation of T+1 settlement. Since FPIs invest in India from different countries and time zones, it could be difficult for them to obtain permissions for stock transfers and other procedures from their custodians or head offices. Moreover, domestic brokers argued against it since it involves the high cost of changing their back office and front office operations. Hence, to ease in the transition, SEBI and exchanges opted for a phased manner.

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