Retail investors cheered the decision when the stock exchanges announced the T+1 settlement cycle. However, custodians and FPIs raised their hands against the decision. Some said there is not enough time to implement the rules, while others knew it would mean lesser profits for them. In any case, BSE and NSE said they will introduce the new cycle in a phased manner, starting February 25.
T+1 Settlement Cycle
It simply means trading+1 day, in which the settlement of equity transactions will happen in less than 24 hours from the day of the transaction. Currently, India follows the T+2 settlement cycle, where it takes 48 hours or more for the client to receive shares in case of purchases. With this new T+1 settlement cycle, India will become the fastest stock market in the world to settle trades. The US is also planning to shift to a one-day settlement cycle during the next two years.
What Are The Custodians Saying?
Custodians like CitiBank, Kotak Mahindra Bank, ICICI Bank and others have asked SEBI to postpone the transition from T+2 to T+1 cycle, because it will result in troubles for both of them and the foreign portfolio investors (FPIs). The current system allows FPIs to carry out trade in two days, which helps them to convert USD or any other foreign exchange to INR as mandated by the end of two days. Now, if the T+1 settlement cycle is implemented, then the capital will not be received one day later.
Banks have opposed this transition, saying that they still need to develop necessary systems, cash flow and forex management processes for FPIs.
The National Stock Exchange and the Bombay Stock Exchange have announced that the T+1 settlement cycle will be phased out on February 25, 2022, with the bottom 100 stocks in terms of market value. Following that, on the last Friday of March 2022 and every month thereafter, 500 more stocks will be added based on the same market value criteria.
How Does It Help Retail Investors?
The T+1 settlement cycle is good because it allows faster movement of funds and means more liquidity in the hands of investors. Today if an investor sells a security on Thursday, he/she receives the money on Monday (T+2).
With the T+1 settlement, he/she receives the money on Friday. This cycle is only beneficial if the ecosystem, including stockbrokers, depositories, depository participants, exchanges, clearing corporations and banks, work together. Any disruption in these can put the settlements on hold. Other than that, T+1 is good for retail investors.