In a circular on Tuesday, the regulator allowed exchanges to move to the T+1 settlement cycle on an optional basis.
As of now, Sebi has introduced this mechanism on an optional basis, so exchanges will decide whether to implement the T+1 settlement or continue with the T+2 old mechanism. The new mechanism will come into force on January 1, 2022.
Experts said the T+1 settlement system will allow the cycle of money to move faster without waiting for an extra day.
However, Mywealthgrowth.com co-founder Harshad Chetanwala said it is too early to comment on the pros and cons of this move, as exchanges may face some operational issues as there are multiple factors and entities involved in completing the entire settlement cycle.
The learnings from this exercise will help in evaluating whether T+1 can work or it is good to continue with T+2 settlement cycle, he added.
Jaideep Arora, CEO, Sharekhan by BNP Paribas said, “The new rule of T+1 settlement is a good move on the part of the regulator as it could help reduce margin requirement for clients with their margin being blocked for 1 day, rather than 2 days”.
Additionally, this reduction in time to get investment back to one day would mean more retail investment would come to equity markets, he added.
“The T+1 settlement is a welcome move for all participants in the stock market, as it allows the cycle of money to move faster without waiting for an extra day,” Prateek Singh, Founder and CEO, LearnApp.com, said.
Sebi has allowed the exchanges to decide which stocks to allow the T+1 settlement in. This means, it is not mandatory for both the exchanges to follow the T+1 settlement process.
“They have the liberty to choose; but the question is if one exchange chooses to opt for T+1 and the other one doesn’t, then wouldn’t that become a little confusing? Brokers will have to first clearly mention and show whether T+1 is available and then which exchange is allowing it,” Singh said.
“My guess is that for the top most liquid stocks, both exchanges will allow the T+1 settlement because there is no reason not to and the less liquid ones will still have a T+2 going forward,” he added.
Vijay L Bhambwani, head of research Behaviour Technical Analysis, Equitymaster, also welcomed the move.
“It means the banks have managed to put in place a faster clearing system for monetary transfer. This means capital can rotate faster and higher turnover is the single biggest factor in boosting the country’s GDP,” he said.
According to him, so far money was moving lethargically in the financial system. Faster settlements means quicker turnaround time. Both in stock markets and the economy as a whole.
Under the new framework, if the exchanges opt for Trade+1 settlement then, they need to continue this settlement for a minimum of six months. After that, exchanges will have the option to opt for a Trade+2 settlement cycle after giving one month’s notice to the market.
“We believe that this new mechanism of Trade+1 day rolling the settlement will help investors to get the stock or fund the next day of the trade itself so that investors can use shares or funds for further transactions,” Yash Gupta, Equity Research Analyst, Angel Broking, said.
He, further, said this will be good for traders as the settlement will be faster and they can use stock or funds for margins, for long term investors it may not impact them much.
“We believe that this is a positive development for brokerages as this can ease some pressure arising from the application of 100 per cent collection of upfront margin starting September 1, 2021,” he added.
This is not the first time that Sebi has chosen to shorten the settlement cycle. Earlier in 2002, the capital markets regulator had cut the number of days in the settlement cycle from T+5 days to T+3 days, and then in 2003, it reduced to T+2 days.
However, for the past 18 years, exchanges are continuing this T+2 days settlement cycle.
Angel Broking’s Gupta said the new mechanism will also impact the auction market as if a seller is not able to deliver stocks on the settlement day, those shares will come in the auction. As of now, auctions are done on T+3 days which will also reduce to T+2 days.
Earlier, brokers association Association of National Exchanges Members of India (Anmi) had raised concerns on issues related to the implementation of the T+1 settlement system.
In its letter to Sebi last month, Anmi, a group of over 900 stockbrokers across the country, had said the T+1 settlement system should not be implemented without addressing operational and technical challenges.
“Shifting to T+1 settlement would make India a pre-funding market and global institutional investors will be faced with multiple issues with this structure,” the brokers’ association had said.
According to Anmi, global investors appreciate the economic efficiency of being able to fund settlement obligations for purchase transactions in one market with sales proceeds from another.