T+1 is a win-win for all

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Market regulator Sebi (Securities and Exchange Board of India) has been contemplating the idea of the adoption of the T+1 settlement system for quite some years now. It has set up a panel comprising representatives of exchanges, clearing corporations and depositories to chalk out a plan. Adoption of T+1 settlement would mean shortening the settlement cycle from two business days to one for India equities. The move is aimed to make stock markets more efficient as it will result in the faster settlement of deals.

The most important benefit of this shortening of the settlement cycle is that it reduces the risk of non-payment or non-delivery of shares by the broker by one day, which is an improvement over the present system. Besides, it will provide liquidity to the investors as they get their funds for the shares sold/credited to their account a day earlier. The investors will have the benefit of profitably deploying their cash for a day more. The real advantage of such an early settlement can be experienced in a volatile market, as it can help efficient use of capital and resultant benefits to the investors. With additional liquidity provided by the improved system, there is every possibility of investors undertaking more transactions in the stock market.

However, there are operational challenges for overseas investors if the settlement cycle is halved to T+1. The securities settlement for foreign portfolio investors (FPIs) is operationally complex, requiring a high degree of coordination between market participants across different time zones. Since working hours in Europe and the US were not aligned with those in Asia Pacific markets. Usually, trade and settlement discrepancies are typically only discovered on T+1 and shortening the existing cycle could create unnecessary costs and settlement risks for global investors.

Figuring out solutions to these operational issues wouldn’t be that difficult as many global organisations, especially banks, have their KPOs in India despite the different time zones between Europe, the US and India. The panel should keep individual Indian investors at the centrestage as they are the big bulls of Indian equity markets contributing 44.7% of NSE’s total turnover in the capital market (cash segment) in July 2021. The solution needs to be devised in such a manner that is acceptable to all market participants and is implementable in the same manner the current T+2 settlement. Else it may create panic and lead to huge losses to investors as witnessed due to the ‘Add-on Price Band Framework’ in the current week.

In short, if implemented seamlessly the proposal of the T+1 settlement cycle will be a boon for investors, brokers and all those involved in the stock market, as it should help in improving the overall sentiment for the benefit of all the stakeholders in the capital market. Besides even mutual fund investors can also expect a faster pay out with better realisation than the current system.