SEBI will soon reduce the transaction settlement cycle to one day. What does this mean for investors?


The market regulator Securities and Exchange Board of India has deployed an option to settle T + 1 transactions on exchanges, currently all exchanges follow the T + 2 transaction settlement cycle in India. Sebi extended this option after numerous requests for shortening the business cycle were made by market players and various stakeholders. Currently, developed countries like the United States follow the T + 2 settlement cycle for stocks, corporate bonds, municipal bonds, mutual funds (ITUs) and T + 0 or T + 1 for instruments money market and government securities.

“SEBI has received requests from various stakeholders to further shorten the settlement cycle. Based on discussions with market infrastructure institutions (exchanges, clearing houses and custodians), it was decided to leave the exchanges the flexibility to offer a T + 1 or T + 2 settlement cycle ”, indicates the press release.

Previously, the market regulator shortened the transaction settlement cycle from T + 3 to T + 2 in 2003. Currently, this T + 1 settlement cycle option is optional and any exchange can choose to offer a T + 1 settlement cycle on one of the scripts after giving one month’s notice. “After having opted for the T + 1 settlement cycle for a script, the Stock Exchange will have to maintain it for a minimum period of 6 months. Subsequently, in the event that the Exchange intends to return to the T + 2 settlement cycle, it will do so by giving the market one month’s notice, ”the press release said.

Simply put, the T + 1 settlement cycle means that after purchasing shares, the shares will be credited to the mat account just one day after the trading day. In the case of a sales transaction, the money would be credited the next day. Earlier the same thing happened in 2 days. The idea of ​​adopting T + 1 was first mentioned in a discussion paper in 2013. At the time, the proposal faced many challenges from foreign and domestic investors. In 2020, the Securities Industry and Financial Markets Association (Asifma) wrote a letter to the market watchdog Securities and Exchange Board of India (Sebi), highlighting the operational difficulties for foreign investors if the settlement cycle is shortened. from half to T + 1.

The association said that since working hours in Europe and the United States were not aligned with those in APAC markets, the current T + 2 market cycle was already effectively a T + 1 settlement cycle. . “The American or European depositories often set deadlines which are the settlement date-1 (SD-1). Investors are required to organize the financing of their transactions and pre-settlement matching during their daylight hours one day before the settlement of transactions, ”the written note to the regulator said. The letter written in 2020 also mentioned that China is the only major market that currently operates on a T0 or T + 1 settlement cycle. SEBI authorizes the T + 1 settlement of stocks. We are now among the first countries in the world to allow this. So when you buy, you can send shares to your Demat or get funds for the shares sold the next day (T + 1) instead of the 2 days (T + 2) currently.

“SEBI authorizes T + 1 settlement of shares. We are now among the first countries in the world to allow this. So when you buy you can send shares to your Demat or get funds for the shares sold the next day (T + 1) instead of the 2 days (T + 2) currently ”, said Nitin Kamath, CEO of Zerodha .

The market surveillance body in the circular also called on exchanges, clearing houses and depositaries to take the necessary steps to put in place appropriate systems and procedures for a smooth introduction of the T + 1 settlement cycle. on an optional basis, including necessary changes to relevant statutes, rules and regulations.

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