Date: 28/01/2023
Relevance: GS-3: Indian Economy and issues relating to planning, Government Budgeting.
Key Phrases: fund remittances, trade-related settlements, share delivery, stock market, T+1 settlement, foreign investors, demat account, operational efficiency, Securities and Exchange Board.
Context:
- India will become the second country after China to implement the one-day cycle that will bring operational efficiency, faster fund remittances, share delivery, and ease for stock market participants.
Background:
- SEBI introduced a rolling settlement cycle in July 2001. Prior to this all the settlements were being done on a fixed day- Fridays on BSE and Tuesdays on NSE.
- This system was riddled with many problems like poor delivery, excessive liquidity and frequent defaults.
- SEBI introduced the rolling settlement cycle after Demat accounts came into operation in 1996.
- Initially a T+5 settlement cycle was being followed, which meant settlements within 5 days from the trading day.
- In 2002 the market regulator shortened it to T+3 cycle and then to T+2 from April 2003, which is being followed till now.
What’s the T+1 Settlement plan?
- The T+1 settlement cycle means that trade-related settlements must be done within a day, or 24 hours, of the completion of a transaction.
- For example, under T+1, if a customer bought shares on Wednesday, they would be credited to the customer’s demat account on Thursday.
- This is different from T+2, where they will be settled on Friday. As many as 256 large-cap and top mid-cap stocks, including Nifty and Sensex stocks, will come under the T+1 settlement from Friday i.e 27th January 2023.
- Until 2001, stock markets had a weekly settlement system. The markets then moved to a rolling settlement system of T+3, and then to T+2 in 2003.
Do You Know?
- India has become the first country in the world to fully implement the ‘trade-plus-one’ (T+1) settlement cycle for investors in top listed securities.
- Aside from China which is partly under the T+1 settlement cycle, most international markets such as the US, Europe, and Japan are still under the ‘T+2’ settlement cycle.
- Whenever you buy or sell a stock, bond, exchange traded fund, or mutual fund, there are two important dates to understand: the transaction date and the settlement date.
- 'T' is the transaction date.
- The abbreviations T+1, T+2, and T+3 refer to the settlement dates of security transactions that occur on a transaction date plus one day, plus two days, and plus three days, respectively.
What are the Benefits of T+1?
- Money within a day:
- In the T+1 format, if an investor sells a share, she will get the money within a day, and the buyer will get the shares in her demat account also within a day.
- Help investors in reducing the overall capital requirements:
- This will also help investors in reducing the overall capital requirements with the margins getting released on T+1 day, and in getting the funds in the bank account within 24 hours of the sale of shares.
- Boost operational efficiency:
- The shift will boost operational efficiency as the rolling of funds and stocks will be faster.
- Reduce the cost of transactions:
- This will help reduce margin requirements and thereby the cost of transactions. It will be helpful to investors and diminish the overall risk for the market.
- Reduce no. of outstanding unsettled trades:
- T+1 settlement cycle not only reduces the timeframe but also reduces and frees up capital required to collateralise that risk.
- A shortened settlement cycle also reduces the number of outstanding unsettled trades at any point of time, and thus decreases the unsettled exposure to Clearing Corporation (CCP) by 50%.
- The narrower the settlement cycle, the narrower is the time window for a counterparty insolvency/ bankruptcy to impact the settlement of a trade.
Why are Foreign Investors Opposed?
- Foreign investors were against SEBI’s T+1 proposal, and had written to the regulator and the Finance Ministry about the operational issues faced by them, as they operate from different geographies.
- Among the issues raised by them were time zone differences, information flow processes, and foreign exchange problems.
- Foreign investors said they would also find it difficult to hedge their net India exposure in dollar terms at the end of the day under the T+1 system.
Conclusion:
- The move to shift to T+1 settlement comes two decades after the Indian market decided to shift the T+2 settlement cycle from T+3 on April 1, 2003.
- Most markets around the world follow the T+2 system. However, digital reliance on trading is pushing bourses to shorten the settlement cycles.
Source: The Indian Express
Mains Question:
Q. Briefly discuss what is T+1 settlement cycle. How will investors be impacted? (Words 250)
