From today India will become second country after China to move to the T+1 stock settlement mechanism in a phased manner.
Under this new mechanism, the buyer and seller of shares will get their shares and money, respectively, within 24 hours. The T+1 stock settlement mechanism will make the existing share purchase and its sale process much faster and more convenient for all stakeholders. ‘T’ in T+1 represents the ‘Trade’ day and ‘+1’ means a day extra.
Suppose, you place an order to buy shares on Monday then by Tuesday evening the shares will get credited to your Demat account. From Wednesday morning you can trade using the shares bought.
Stocks were settled using the T+2 mechanism till now. Under this system the stocks which were bought on Monday (Transaction day) were credited to the user’s Demat account only on Wednesday evening and then from Thursday morning onwards they could trade using it.
The stock exchanges and other stakeholders have decided to first group securities in the descending order of their average market capitalization in the month of October 2021. From this list, the bottom 100 stocks will be settled using the T+1 mechanism starting February 25. In a joint exchange circular, it was mentioned that starting from March 2022 on every last Friday of the subsequent months the next bottom 500 stocks will be settled using the new T+1 mechanism. The implementation of the T+1 cycle is intentionally done in a phased manner so that the Foreign Portfolio Investors (FPI) do not face any problem implementing this change in their backend trading system.
One of the biggest risks in stock trading was the settlement risk. So a faster settlement cycle will reduce the operational risk of a stockbroker and also reduce the overall risk of default in the entire stock investment industry. It may also increase liquidity at the client level since the proceeds from the sale of a share are happening within a day so the funds wouldn't need to stay locked unnecessarily.
Before the introduction of rolling settlement of stocks by SEBI, the stocks used to get settled only on fixed days in a week. This was because share certificates were printed on paper and they had to be moved whenever a transaction occurred. On July 9, 1997, about 25 years ago, the National Stock Exchange (NSE) implemented the T+5 stock settlement mechanism. From 1st April 2002 SEBI proposed to change the settlement cycle from T+5 to T+3. Then from 1st April 2003 SEBI proposed to change the settlement cycle to T+2 and since then it has been normal. Today 25th February 2022 onwards India will move to the T+1 stock settlement cycle.
