Beating the big boys: Sebi's move for complete T+1 and towards T+0 explained

The Securities and Exchange Board of India (Sebi) Chairperson Madhabi Puri Buch has announced that India's stock markets will move towards a T+1 (trade + 1) settlement cycle for all scrips, starting October 1, 2023. The regulator is also working towards T+0, or instant transaction settlements. What will actually change in the trading ecosystem and what can we expect in coming months?

By Salil Panchal Forbes India Staff

Published: Jul 25, 2023 05:20:06 PM IST

Updated: Jul 25, 2023 05:32:00 PM IST

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October onwards, the T+1 settlement will apply for all scrips, not just the most popular or highly traded ones. Image: Indranil Mukherjee / AFP

How has settlement of trades been taking place so far?

Most of the popular scrips or where their trading turnover is high, the clearing had since January-end this year, already shifted to T+1. This basically means that the trade is settled in one day after the date of trade.

From January 27, all top listed securities, which includes shares, exchange-traded funds (ETFs), real estate investment trusts (REITs), infrastructure investment trusts (InvITs), sovereign gold bond (SGB), government bonds, and corporate bonds trading in the equity segment was being settled on T+1 basis.

This process was, of course, much slower in previous decades. Prior to year 2000, until corporatisation of stock exchanges and the development of automated depositories were complete, settlement of trades was on a weekly basis.

Historically, the longer a settlement cycle, the larger are the trades which stand unsettled at any one point of time. The settlement cycle was then changed to a T+3 system; followed by T+2 in 2003. So, under T+2, if you buy a share on Monday, it will be delivered to your demat account only on Wednesday.

If T+1 is already here, then what changes October onwards?

October onwards, the T+1 settlement will apply for all scrips, not just the most popular or highly traded ones. The confidence in India’s digital ecosystem—where the rapid execution of bank transfers and the massive reach of the Unified Payments Interface (UPI)—is also being reflected in the fact that securities trading transactions will continue to be smooth.

Is T+0 – or instant settlement of transactions—coming soon?

Buch has said that the day is not far when stock market transactions will be settled instantaneously, in T+0 mode. She said the regulator is working with stakeholders to improve the timelines for settlement of transactions and achieve this goal. This would, of course, be a big boost towards the buying and selling of various mutual fund products. She adds that Sebi is working towards upping the pace of new equity issuances, debt issuances, approvals for mutual fund schemes using technology and other interventions with the aim of helping capital formation in the economy.

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Are other countries already on T+1 settlement cycle?

Globally, most stock exchanges in developed as well as emerging markets follow the T+2 settlement system. Some stock segments of China’s stock markets are on the T+1 settlement. In the United States – probably the largest and most liquid market—the SEC has adopted the rule of T+1 settlement effective May 28, 2024 onwards. A move towards the swifter T+1 could follow in Canada’s stock markets, though no date has been set out.

So, can one assume transparency, efficiencies and improved risk management?

It obviously makes it easier for quicker buying and selling of shares in our markets. It will improve cost efficiencies and transparency in the overall market, besides improving transparency and reducing the risk of fraud. Ensuring uniformity will also improve efficiencies.

Will there be more changes to peak margin requirements from traders?

The shorter settlement cycle means that the market regulator will not press for higher margin requirements—than existing ones—that brokerages mandate from their clients.