T+1 Settlement System for Shares: SEBI

• 14 Sep 2021

Why in News

Recently, Securities and Exchange Board of India (SEBI) allowed stock exchanges to start the T+1 system as an option in place of T+2 for completion of share transactions.

• It has been introduced on an optional basis in a move to enhance liquidity.
• SEBI is a statutory body established in 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992.

Settlement System

• In the securities industry, the trade settlement period refers to the time between the trade date that an order is executed in the market and the settlement date when a trade is considered final.
  
  • On the last day of the settlement period, the buyer becomes the holder of record of the security.

Key Points

• About:
  
  • If the stock exchange opts for the T+1 settlement cycle for a scrip, it will have to mandatorily continue with it for a minimum 6 months.
    
    • A scrip is a substitute or alternative to legal tender that entitles the bearer to receive something in return.
  • Thereafter, if it intends to switch back to T+2, it will do so by giving one month’s advance notice to the market. Any subsequent switch (from T+1 to T+2 or vice versa) will be subject to a minimum period.
• T+1 vs T+2 Settlement:
  
  • In T+2, if an investor sells shares, the settlement of the trade takes place in two working days (T+2) and the broker who handles the trade will get the money on the third day, but will credit the amount in the investor’s account only by the fourth day.
    
    • In effect, the investor will get the money only after three days.
  • In T+1, settlement of the trade takes place in one working day and the investor will get the money on the following day.
    
    • The move to T+1 will not require large operational or technical changes by market participants, nor will it cause fragmentation and risk to the core clearance and settlement ecosystem.
• Benefits of T+1 Settlement:
  
  • Reduced Settlement Time: A shortened cycle not only reduces settlement time but also reduces and frees up the capital required to collateralise that risk.
  • Reduction in Unsettled Trade: It also reduces the number of outstanding unsettled trades at any instant, and thus decreases the unsettled exposure to Clearing Corporation by 50%.
    
    • The narrower the settlement cycle, the narrower the time window for a counterparty insolvency/bankruptcy to impact the settlement of a trade.
  • Reduction in Blocked Capital: Further, the capital blocked in the system to cover the risk of trades will get proportionately reduced with the number of outstanding unsettled trades at any point of time.
  • Reduction in Systemic Risks: A shortened settlement cycle will help in reducing systemic risk.
• Concerns of Foriegn Investors:
  
  • Foreign investors have concerns about operational issues they would face while operating from different geographies - time zones, information flow process, and foreign exchange problems.
  • They will also find it difficult to hedge their net India exposure in dollar terms at the end of the day under the T+1 system.

Source: IE