What Is T+1 Settlement Cycle And Its Benefits

On January 27, 2023, India joined China as only the second country to adopt the T+1 (Trade + 1) settlement cycle, a transformative step spearheaded by the Securities and Exchange Board of India (SEBI). This shift from the T+2 cycle underscores India’s commitment to modernising its financial markets, aiming to boost operational efficiency, accelerate fund and share delivery, and enhance the trading experience for investors. 

T+1 promises greater liquidity and safety by shortening the settlement timeline, though it has sparked concerns among foreign investors. This article explores the T+1 settlement cycle, its advantages, challenges, and its impact on India’s stock market.

What Is T+1 Settlement?

The T+1 settlement cycle requires all trade-related settlements to be finalised within one business day of the transaction. For instance, shares purchased on Tuesday will be credited to an investor’s Demat account by Wednesday. 

This marks a significant improvement over the T+2 cycle, which allowed two business days for settlement. India’s stock market has evolved significantly over the years, moving from a weekly settlement system until 2001, to T+3, then T+2 in 2003, and now to T+1.

Benefits of the T+1 Cycle

The T+1 system introduces several key benefits:

• Enhanced Efficiency: By halving the settlement period, T+1 streamlines trading processes, enabling faster transactions and increasing trading volumes.
• Improved Liquidity: Traders gain quicker access to funds, with margins released on T+1 and proceeds from share sales available within 24 hours, facilitating seamless capital rotation.
• Lower Capital Needs: The shorter cycle reduces the capital required for margins, making trading more cost-efficient for investors.

Why Do Foreign Investors Oppose T+1?

Foreign investors have expressed reservations about the T+1 cycle, citing operational hurdles:

• Time Zone Challenges: The compressed timeline creates difficulties for investors in different time zones, complicating the coordination of fund transfers and trade confirmations.
• Hedging Difficulties: The shorter settlement period makes it harder for foreign investors to hedge their net exposure in India by the end of the trading day.
• Foreign Exchange and Information Flow: Issues with currency conversion and timely information dissemination add further complexity.

These concerns led foreign investors to submit formal objections to SEBI and the Finance Ministry, resulting in a temporary deferral of the T+1 proposal in 2020.

Does T+1 Make the Market Safer?

SEBI highlights that T+1 enhances market safety by reducing the number of unsettled trades at any given time, cutting exposure to counterparty risks by 50%. A shorter settlement window minimises the risk of defaults or bankruptcies disrupting the trade cycle. Additionally, T+1 lowers the capital needed to collateralise risks, strengthening the market’s overall stability.

T+1 Settlement Stocks

The transition to T+1 began with a phased approach, with the first batch of stocks moving to the new system on February 25, 2022. By January 27, 2023, approximately 5,300 stocks were expected to operate under the T+1 framework, covering a significant portion of India’s stock market.

Conclusion

The T+1 settlement cycle marks a bold step toward a more efficient and liquid Indian stock market, offering faster settlements, reduced capital requirements, and enhanced safety. However, challenges such as potential banking downtimes and opposition from foreign investors highlight the need for robust infrastructure and global coordination. While international markets like the USA, UK, and Japan continue with T+2, India’s adoption of T+1 positions it as a pioneer in financial market innovation, balancing opportunities with operational complexities.