How will the T+1 settlement cycle affect Indian stock markets?

Short Answer

The T+1 settlement cycle is set to bring in many advantages to traders as investors as there will be an increase in liquidity and trading volume. There will be a subsequent reduction in the brokerage defaults and settlement auctions. On the other hand, there could be some problems like mismatch in liquidity among exchanges, FPI complications, etc.

Detailed Answer

What is the T+1 settlement cycle in the Indian stock market?

The T+1 settlement cycle will be implemented from the 1st of January 2022, wherein a script that’s under this scheme will be delivered to you within the next day (under 24 hours). This also means that if you sell your stocks, you will receive the money as proceeds into your account by the next trading day.

The SEBI (Securities Exchange Board Of India) has made this new T+1 settlement cycle optional for exchanges. Under which an exchange, for example, NSE (National Stock Exchange) has to give an advance notice period of one month, in order to convert a script into the new T+1 settlement cycle.

Similarly to convert a script back to the T+2 settlement cycle, the script needs to have served at least a minimum of 6 months in the new cycle before getting back to the T+2 cycle, and the exchange has to similarly give notice of one month in order to bring the back to its previous cycle.

What will be the implications of the new T+1 settlement cycle?

The new settlement cycle will have many positive impacts on traders as well as investors. Although there could be some negative consequences as well, without the proper coordination. Let find out the likely outcomes from the implementation of the new settlement cycle.

1. Increased liquidity and turnover

The new settlement cycle will increase the movement of stocks and money as compared to earlier when stocks used to sit around for a whole day before going to their respective owners. Similarly, the money that a seller had to get from the sale of stocks would be received only at the end of the second day. Now with the new cycle, stocks and money will change hands faster which in turn will increase the liquidity and drive volumes higher, in the overall market.

2. Reduced defaults

With the implementation of the new cycle, the number of settlement defaults will get reduced. As the funds will get settled within one day, the number of settlement auctions can get settled quickly. Brokers defaults will also come down as brokers will be obliged to settle all the securities and funds within 24 hours, leaving less margin for error.

3. FPI challenges

There are some downsides to this implementation as well. FPI (Foreign Portfolio Investors) might face some challenges in getting accustomed to the newer cycle. Multiple factors like the time difference and overseas fund transfer speeds can dampen the FPI sentiments in the initial days.

4. Liquidity challenges among exchanges

As the new T+1 cycle is made optional for exchanges, which means one script can be trading at the T+1 settlement on one exchange and a different cycle on the other. For example, let's take the stock of ITC and assume that the NSE has implemented the T+1 settlement cycle for the stock whereas the BSE has the script at a T+2 settlement cycle.

This in return will reduce the liquidity on the BSE as traders will flock towards the NSE to trade the stock to get faster delivery. A similar mismatch of settlement cycles can arise if both exchanges don’t coordinate.

Bottom Line

To sum it up, the new settlement cycle will bring multiple positives for the retail traders as well institutions. Although Foreign investors might take some time to get adjusted to the new regime. Indian regulators might also have to make certain technological advancements to maintain a smooth flow of operations. In the end, with proper coordination and the necessary structural changes, all will benefit collectively with the implementation of the T+1 settlement cycle.

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Categories: Stock Market
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