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T Plus 1 Settlement for Stocks Kicks In from 27 January 2023

01 Dec 2023

In global financial markets, the sphere of equity is regulated by the T + 2 settlement system where trade settlement is concerned. In markets like those of the US, Germany and Japan, this settlement follows a longer settlement cycle than in India. This January 2023, India will follow the T + 1 settlement cycle which was initially introduced by SEBI, the Securities and Exchange Board of India in 2021. From then, the markets have been adopting this settlement method in a gradual manner of execution.

T+1 Settlement - Mandatory for All Stocks Now

Before you understand how India has made the transition to the T + 1 settlement, you should know what this is all about. Simply put, the T + 1 settlement for stocks is a cyclic system of settlement to get the delivery of shares purchased on the day following that which the transaction is made. As you may well know, you have to open a demat account as a first step to investing in the stock market. After this, you must make yourself aware of settlement cycles and other aspects of trading and investing.

Since the T + 1 settlement for stocks system is a complex one, not to understand, but to implement given the large volume of shares and trading activity, SEBI introduced it to be put into action in a stage-wise manner. The process was first regulated and adopted for small capitalization stocks. Nonetheless, with effect from 27 January 2023, all stocks, irrespective of market capitalization, would be settled according to the T + 1 settlement regulations. With the last stage of the process in action, 250 large-capitalization shares come under the purview of the fresh and brief settlement cycle. This includes components of the benchmark NIFTY index.

The Impact on Investors and Traders

During the time of the T + 1 settlement phase, investors and traders were required to wait for two working days before a delivery of stocks was made into demat accounts. In case shares were sold, the funds would be credited after two days too. With this new cycle in action, you get share delivery the next day, or in the event, you make a sale of stock, funds are credited on the following day. Hence, if you buy shares on a Tuesday, they are in your demat account on Wednesday.

The T + 1 settlement for stocks impacts traders and investors positively. This short cycle of settlement aims at the efficiency in transactions made by participants in the market. Time is of the essence to traders and investors and wrapping up settlements one day earlier helps to go forward with more transactions.

The Impact of T + 1 settlement on Foreign Investors

With the advent of technology in operations in how you transact with shares or make investments, like investing in any upcoming IPO, every action has become effortless and less time-consuming. In the case of foreign investors or FPIs (foreign portfolio investors) as they are called, the decision about a short settlement system caused some anxiety. Unlike local or Indian investors whose money is put in a single market entirely, FPIs place funds in many markets.

Globally, the previous T + 2 system supported FPIs and their operations. Initially, they were wary of changing systems just to match Indian markets. Nonetheless, with investment opportunities brimming in the Indian markets, FPIs have aligned their procedures with the T + 1 settlement process. Furthermore, the Securities and Exchange Board of India and the Reserve Bank of India have relaxed norms for FPIs, allowing for transactions to carry on into the late evening too.

Why is the T + 1 Settlement Advantageous for Indians?

Trading and investment is the way to go if you want good returns. Investors and traders are attracted to markets, mainly for the rewards they may reap, but also for the convenient way the markets are managed. There are certain advantages for traders and investors with the new T + 1 settlement mechanism:

  • Share and capital delivery is faster than in previous times during the T + 2 settlement system.
  • In case a trader has taken a loan to make an equity purchase, they will enjoy saving on the interest of a day.
  • SEBI has introduced the system to match with evolving technology and the improvement of efficiency in transactions.
  • With a one-day cycle, investors can take opportunities with ease when they present themselves, rather than have to wait to sell off a share that has risen suddenly after it has been bought, for instance.

New Systems, New Benefits

In the global investing space, the way to settle transactions in most markets is through the T + 2 settlement system. In the developed markets, you may want to invest in stock, like the US or German markets. In case you do, the system that will be followed for settlement will still be T+ 2. This is the case with Hong Kong and Japan as well, and with European markets. You may open a demat account to trade in these stocks as India has liberalized rules for trading in foreign stocks. You can also check out an upcoming IPO when you look at Indian or foreign stocks to invest in.


Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account 


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