- Date : 17/03/2023
- Read: 4 mins
The shorter T+1 settlement cycle, apart from helping buyers receive securities faster and the sellers receive money faster, will improve overall liquidity and reduce counterparty default risk. Also, it puts India ahead of advanced economies like the US and European markets.
The Indian equity market is among the handful of markets that have progressed to the T+1 settlement cycle. In this article, we will understand the T+1 settlement cycle and its benefits for investors.
What is the T+1 settlement cycle?
From 1st February 2023, AMCs have moved to the T+2 settlement cycle for equity mutual funds from the earlier T+3 settlement cycle. Earlier, SEBI introduced the T+1 settlement cycle for equity shares.
The T+1 settlement cycle means the securities traded will be settled in 1 trading day. For example, if a share trade has been done today, its settlement will be done on the next working day. Settlement means:
a) For a share buy transaction, the bank account will be debited, and the demat account will be credited
b) For a share sell transaction, the bank account will be credited, and the demat account will be debited
Also Read: 7 Things On Demat Account Every Indian Investor Must Know About
If the stock market is closed on the following day due to a public holiday or it is a weekend (Saturday/Sunday), the settlement will be done on the next working day.
a) For example, if Ritesh made an equity sell trade on 24th January 2023 (Tuesday), his demat account would be debited for the shares on 25th January (Wednesday).
b) If Ritesh did equity buy trade on 25th January 2023 (Wednesday), his demat account would be credited with the shares on 27th January (Friday) as 26th January (Thursday) is a public holiday.
c) Similarly, if Ritesh made an equity sell trade on 27th January 2023 (Friday), his demat account would be debited for the shares on 30th January (Monday) as there is a Saturday and Sunday in between.
Benefits of the T+1 settlement cycle
For investors, the two most significant benefits of the T+1 settlement cycle are:
1) Faster credit of shares in demat account in 1 working day for equity buy transactions. It will help the investor sell the share the next day if they wish to. Otherwise, they have to wait to receive the shares and then put in their sell order.
2) Faster credit of money in the bank account in 1 working day for equity sell transactions. Faster credit will help the investor use the funds for the next transaction the next day itself. Otherwise, they have to wait to receive the money before initiating the next transaction.
Share trading involves the risk of non-delivery of the shares or non-payment of the amount by either counterparty. The above risk may arise due to counterparty insolvency or bankruptcy. A shorter settlement cycle will reduce this counterparty risk.
Also Read: 6 Common Stock Trading Mistakes You Should Avoid
Some trades, such as futures and selling options, require the investor to put in an upfront margin. The margin amount is blocked till the trade is closed. A shorter settlement cycle will help in releasing the margin amount early and, thus, help in improving liquidity. Higher liquidity can help investors do more transactions.
Equity mutual funds move to the T+2 settlement cycle
In the above section, we saw how equity markets have moved to the T+1 settlement cycle from the earlier T+2 settlement cycle. To pass on the benefits of the shorter T+1 equity settlement cycle to the investors, the asset management companies have decided to implement the T+2 settlement cycle for equity schemes from the earlier T+3 settlement scheme.
The shorter T+2 settlement cycle for equity schemes will ensure that mutual fund unit(s) buyers receive the equity scheme units faster in their folio and mutual fund unit(s) sellers receive the money faster in their bank account.
The shorter settlement cycle puts India ahead of developed markets
The shorter settlement cycle helps the buyers get securities faster, and the sellers get money faster. At the same time, the short settlement cycle improves liquidity and reduces the chances of counterparty default. The shorter T+1 settlement cycle for equity markets puts India ahead of the developed markets like the US and European markets that are still following the T+2 settlement cycle.