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quicker settlements to bring cheer to retail investors

quicker settlements to bring cheer to retail investors

Indian stock markets have moved to a T+1 settlement system in a phased manner. this will process buy/sell transactions of equities in just a day.
March 9, 2022
5 min read
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Indian stock markets have moved to a T+1 settlement system in a phased manner. this will process buy/sell transactions of equities in just a day.

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imagine you ruined your outfit for a friend’s wedding and had to reorder something else. it arrives, but a day after the event. irritating right? the dress was ordered for a specific purpose. a purpose that wasn’t served. the same concept applies to the equity markets as well. 

as an equity investor, say you noticed a trend that could potentially impact a stock’s price. you want to sell and immediately utilize the funds to buy another stock. but the selling itself would take two days. not anymore.

from February 25, the Indian stock exchanges BSE and NSE began the phase-wise transition to a T+1 settlement cycle. simply put, this means that buy and sell transactions on these exchanges will be completed in one day.

for instance, if you bought X stock on Monday, it will be in your demat account on Tuesday. or if you sold the stock, the money will be credited by Tuesday. earlier, this took two days. 

the exchanges have started with 100 stocks with the lowest market valuation and will be adding 500 stocks every last Friday of the month till the transition is complete.

how do investors benefit?

in the world of stocks, even a 24-hour delay can make a world of difference considering the volatility and number of trades made. with the T+1 settlement system, an immediate benefit is getting access to funds at shorter intervals. these funds could then either be reinvested into the stock market or used for other purposes. 

the latest data showed that there were 7.7 crore demat accounts in India, as of November 2021. this figure more than doubled from 3.6 crores in March 2019. about 75% of the new account holders are under-30 investors, which makes the T+1 settlement even more relevant. 

India is among the first countries globally (after China) to move to T+1. evolved markets such as the United States are firming up plans to move to a similar cycle by 2024. every other country in the world still follows the T+2 cycle. 

for retail investors in India whose livelihood solely depends on stock market transactions, this shift makes it an attractive proposition to invest further. emergency cash can also be withdrawn in a day by selling stocks due to the new cycle. and for prospective investors, this is a nudge to enter. 

the new system is also lucrative for entrepreneurs who invest in stocks. since the settlement is made in a day, the funds credited can then be used for business-related investments. similarly, if the stock is credited in a day, any sudden price increase benefits can help improve the investment income.    

to take an example, let’s say an entrepreneur Y has bought 500 stocks of ABC company for Rs 3,000 each on Monday. the stock price increased to Rs 3,100 on Wednesday because of a global market recovery but dropped back a day later. under T+1 settlement, Y instantly makes a profit of Rs 50,000 because the stock is credited to his demat account within a day. the profit amount can then be withdrawn and put to use for business expansion.

but, why are FIIs miffed?

Foreign Institutional Investors (FIIs) work on different principles and are not too pleased with the shift. the reason for the discontent is that in a T+1 settlement they have to immediately arrange for funds to make a purchase. 

so, FIIs need to first transfer the money before buying the stocks. In T+2, they could arrange for the funds in the 48 hour period. these large institutions also defer purchases if the market is suddenly getting volatile. in T+1, deferment could be operationally difficult since the payment is already made. 

these entities sought additional time to tweak the systems for T+1. while a postponement proposal was not accepted, the investors are being given time to prepare for the changes, including getting the local custodian to settle trades on time. 

considering the challenges in shifting the whole system into T+1, markets regulator Sebi has opted for a phased approach. taking the 500 stocks per month rule (plus the 100 initial stocks), this year only 5,100 stocks out of the approximately 7,500 listed companies will be brought under T+1 settlement. 

this gives the domestic brokers as well as foreign institutions time to gear up for the big shift. eventually, quicker settlements will improve the liquidity conditions of the investors, improving the transaction speed and vibrancy. it is a win-win for all stakeholders.