T+1 Settlement Cycle for Stocks

For people who trade in the share market, buying and selling shares is the most exciting part of their routine. However, did you know that unlike online or mobile transactions, where you can send or receive money instantly, it takes a little time for the trade to be finalised in the share market?

For example, if you buy shares today, it might take a couple of days (depending on the market's rules) for the shares to actually be in your account and for the money to be transferred to the seller. This period is called the settlement cycle. In April 2002, the T+3 rolling settlement cycle was introduced in India. However, this cycle was shortened to T+2 in April 2003.

• As per SEBI guidelines, since January 27, 2023, all F&O and T+2 stocks have transitioned to the T+1 settlement cycle.
• India has become the second country after China to make this transition.
• A shorter settlement cycle boosts liquidity, allowing the market to operate more efficiently.
• T+1 cycle minimises risks by shortening the time between trades.

Under the leadership of Madhabi Puri Buch, Chairperson of the Securities and Exchange Board of India (SEBI), the T+1 settlement cycle for all stocks was announced. Starting January 27, 2023, all F&O stocks and other stocks currently on the T+2 settlement cycle have transitioned to the T+1 settlement cycle.

Note: SEBI rolled out the beta testing for the T+0 settlement cycle for select stocks in early 2024.

Let us understand the T+1 settlement cycle for stocks and how it can impact your investments.

Before we get into the T1 settlement, let us understand what a settlement cycle is in trading.

You would know by now that trading involves buying and selling equities and derivative instruments. For the transaction to be complete, both ends of the order—the buyer and the seller—need to execute the order. Only when both the orders are matched will the stocks be credited or debited to a demat account.

As per the new guidelines, rather than T+3 or T+2 settlement, T+1 will be the settlement cycle. Here’s an example to help you understand this process.

Suppose you purchased some shares on Tuesday. The shares will not immediately reflect in your demat account. It will take +1 day, so the shares will be credited to your account on Wednesday. Similarly, if you sell the shares on Tuesday, they will be credited to the buyer’s account on Wednesday. Only after Wednesday evening can these funds be withdrawn from the trading account.

Fixed settlement cycles are considered to bring distrust among traders as they can bring defaults and poor delivery. From T+5 to T+3 and now T+1, trading in India has undergone major transformations. By moving onto the T+1 settlement cycle, India has become the second country after
China to do so.

Shortening the settlement cycle has been seen as a welcome step. Here’s how it can benefit the entire ecosystem:

Faster access to cash and securities

It goes without saying that a shorter settlement cycle means that buyers will own their securities sooner, and sellers will get quicker access to their funds. Thus, they will be able to invest their money sooner.

Efficiency in trading

When there is increased liquidity, the market will move faster and more efficiently.

Reduce overall capital requirement

When the margin is released on T+1 day, traders will be able to reduce their dependency on borrowed capital. Rolling of funds and stocks will become easier.

Reduced risks

A short settlement cycle also helps in lowering the risk associated with the processing of transactions. Thanks to the lower price-value movements in securities, there is an increase in financial stability.

SEBI highlights that the T+1 settlement cycle will enhance safety in the Indian stock market by speeding up transactions, increasing cash flow, and reducing the capital required for risk coverage. With fewer unsettled trades, exposure to the Clearing Corporation decreases by 50%, lowering the risk of bankruptcy impacting trades.