SEBI Introduces T+1 Settlement Cycle
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)
- https://www.thehindubusinessline.com/markets/stock-markets/sebi-introduces-t1-settlement-cycle-on-optional-basis/article36342765.ece
- https://www.investopedia.com/terms/t/tplus1.asp
- https://indianexpress.com/article/explained/t1-settlement-system-how-it-works-and-how-it-will-help-investors-7506987/
- https://m.economictimes.com/markets/stocks/news/sebi-gives-bourses-option-to-rollout-t1-settlement-for-stocks/articleshow/86009492.cms
- https://www.moneycontrol.com/news/business/sebi-introduces-t1-settlement-for-stocks-on-optional-basis-7441641.html
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