NSE, BSE to roll out T+1 settlement for stocks starting today; what is it, how it helps investors, exchanges? Explained

Indian stock exchanges (NSE and BSE) are all set to roll out T+1 settlement staring Friday, February 25. The new settlement cycle of funds & securities will be implemented in a phased manner with bottom 100 stocks in terms of market value. Earlier, Securities Exchange Board of India (SEBI) has cut down settlement cycle from T+3 days to T+2 days in 2003.  

What is the settlement cycle?  

It is the time frame under which the stock exchanges have to settle security transactions within stipulated business days. T+1 means that market trade-related settlements will need to be cleared within one day of the actual transactions taking place. Currently, the domestic stock exchanges follow T+2 days cycle. This means now a security transaction will have to be settled within 24 hours, instead of 48 hours. It is to be noted that this cycle will be implemented on select stocks and in a phased manner.  

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Explaining the settlement cycle, Anupam Agal, Head Operations & Legal, Motilal Oswal Financial Services, says, "Settlement marks the official transfer of securities to the buyer's account and cash to the seller's account. Indian stock exchanges follow T+2 days settlement i.e. settlement of funds & securities happens on two business days after the day the order executes, or T+2 (trade date plus two days). For example, trade executed on Monday would typically settle on Wednesday." 

How will the new cycle be implemented?  

The Stock Exchanges have informed of implementing T+1 settlement cycle in a phased manner, starting with 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 T+1 settlement cycle will get their money or shares delivered in less than 24 hours. 

How does it help investors, stock exchanges?  

Well, as it cuts down settlement time significantly, it's clearly hinting at a faster execution of trade and efficiency.  Besides, it will increase liquidity in the market. Anupam Agal opines that it would prove a good move making settlement cycle shorter reducing margin requirement for clients with margin blocked for just 1 day. Thereby, increasing retail participation & investments coming to equity markets. 

Besides, T+1 settlement system will shorten the settlement cycle by a day reducing risk of pay-in/pay-out defaults, lower margin requirements and give investors more liquidity with availability of funds and securities, adds Motilal Oswal expert.  

Background 

The decision has been taken by market Infrastructure Institutions or MIIs – stock exchanges, clearing corporations and depositories. This comes after markets regulator Sebi in September permitted stock exchanges to introduce T+1 settlement cycle from January 1, 2022 on any of the securities available in the equity segment. 

“All listed stocks, across stock exchanges, shall be ranked in descending order based on daily market capitalization averaged for the month of October 2021. Where a stock is listed on multiple exchanges, the market capitalization shall be calculated based on the price of the stock at the stock exchange with highest trading volume during the above-mentioned period," BSE and NSE had said in a circular last year. 

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)