SEBI Introduces T+1 Settlement Cycle

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THE NEOTERIC ANNOUNCEMENT OF SEBI

On September 7, 2021, SEBI acceded stock exchanges to begin the T+1 settlement system as an option in place of T+2. With this announcement, Stock markets in India will be able to soon transfer shares and money into client accounts within 24 hours with SEBI in the T+1 settlement system for equity transactions from January 1, 2022.

SETTLEMENT DATES

Back in the days when security transactions used to be done manually instead of electronic way, investors had to wait for the delivery of the certificate of purchased securities before they proceeded for payment. This made the seller wait for the payment for a longer period. As the delivery times could differ and prices were flexible, market regulators used to set a period for delivering the securities and cash into the account. So, in the old days, the settlement date was T+5 which means five business days after the day of the transaction then it was set as T+3, and currently it is T+2.

These settlement dates may vary according to the nature of the security. For instance, Treasury bills are the only type of security which can be transacted within the same day of the transaction.

FOREIGN INVESTORS HAVE SHOWN THE RED FLAG

SEBI had shelved to bisect the trade settlement cycle to T+1 following opposition from foreign investors in 2020 who have also written to SEBI and the finance ministry regarding operational affairs they would face while operating from various geographies, different time zones, and foreign exchange problems. They will also find it difficult to enclose their net India exposure in dollar terms at the end of the day.

WHY T+1 CYCLE?

1. A shortened cycle always reduces the settlement time 
2. It also reduces the capital need to collateralize that risk.
3. It decreases the unsettled exposure to Clearing Corporation by 50% as it reduces the number of outstanding unsettled trades at any instant.
4. The capital blocked in the system to protect the risk of trades will get correspondingly decreased with the number of trades that are outstanding unsettled.
5. Systemic risk relies on the number of outstanding trades at critical institutions. Hence, a shortened settlement cycle is going to help in decreasing systemic risk, according to SEBI.

NEED TO CONSIDER SOME ISSUES TOO

CEO and founder of Zerodha Nithin Kamath stated “We are now amongst the first few countries to allow this. I guess what we will need to figure out is how settlements will work if one exchange adopts T+1 and the other is on T+2 when the same stock trades on both exchanges.”

Various foreign brokerages also said we should not implement the T+1 system without knowing and considering operational and technical issues.

Concerns also expressed by The Asia Securities Industry and Financial Markets Association, mentioned T+1 settlement system will make India a pre-funding market for global institutional investors, mainly those from the Europe and US.

Written by Yogita (Guest Contributor)

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