Here’s how T+1 affects your life: Shorter settlement cycle to boost liquidity and make BTST trades smoother
- The shorter
trade settlement cyclefor all the listed securities in the Indian equity market comes into effect from today, January 27, 2023.
- From now, securities or stocks traded on exchanges will reflect in a person’s demat account in one day rather than after two days that was the norm earlier.
- It is expected to make BTST ie. buy today, sell tomorrow trade, smoother
- India will be the second largest market after China to implement the ‘T+1’ settlement cycle.
The Indian stock market has adopted a one-day trade settlement cycle for all listed securities with effect from today, January 27, in an effort to boost liquidity. This makes India one of the few markets to fully adopt the shorter settlement cycle. What this means is that securities or stocks traded on exchanges will reflect in a person’s demat account in one day, compared to two days earlier.
From now, all securities including stocks, ETFs, debt instruments, REITs, and InvITs will be moving to the T+1 settlement cycle. “Stocks bought on Friday will be settled as per their new settlement cycle, T+1, and will be available for selling on Monday,” said brokerage firm Zerodha in a bulletin on its website.
The process of stock moving to the shorter trade cycle began in February 2022. Gradually, stocks have been added every month, starting with low capitalisation stocks. Now, the last batch of over 250 stocks will get on to this cycle, completing the process.
Analysts believe the adoption of a shorter trade settlement cycle is expected to improve liquidity and investor participation in the market. Besides, India will be the second largest market after China to implement the ‘T+1’ settlement cycle. Markets in the US, Europe, Japan and Canada still have a settlement cycle of two days (T+2).
“Cycle of money would move faster due to this historic event in Indian capital markets. All issues related to BTST (buy today sell tomorrow) trade like bad delivery, auctions due to T+2 settlement would be reduced to big extent and from hereon we may see more liquidity in the market,” said Prasad Sawant, head of advisory at IIFL Securities
The shorter settlement period will provide a seamless trading experience to investors with quick rolling of funds.
“It augurs well for the Indian equity markets from a liquidity perspective and it shows how well we have grown on the digital journey to ensure seamless settlements within 24 hours. This will also help the investor in reducing the overall capital requirements with the margins getting released on T+1 day and getting the funds in the bank account within 24 hours of sale of shares. The shift will boost the operational efficiency as the rolling of funds and stocks will be faster,” said Ajay Menon, MD & CEO of broking and distribution at Motilal Oswal Financial Services.
SEBI, in a statement, had said that to bring in operational efficiency and ease for market participants. Market experts have expressed their excitement over the positive move.
“Starting tomorrow, India will become the first major market to completely move to a T+1 settlement cycle (China is partly T+1). It is crazy how far ahead we are in terms of market infrastructure and safety, even when compared to the developed world,” said Nithin Kamath, founder and CEO at Zerodha.
“You might be wondering, why isn't instant settlement like payments possible. This is because most trading volumes on the exchange are from intraday traders who buy and sell stocks without taking delivery or have the stocks to deliver immediately,” explained Kamath in a LinkedIn post.
One important thing to note is that the change is applicable for stocks traded on Friday and not those traded on Wednesday.
“Due to a change in the settlement cycle, any of these stocks bought on Wednesday, 25th January 2023, will not be available for selling on Friday, 27th January 2023 due to the risk of short delivery and subsequent auction penalty which can be up to 20%. They will be settled by the exchange on Monday as per the old T+2 settlement cycle and will be available for selling on Monday,” informed the brokerage Zerodha on its website.
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