Quick settlement

T+1 will increase liquidity

On Friday, the Indian stock market completed the shift to a “T+1” settlement system, where every transaction will be completed within one working day post-trade. That is, if a stock is traded on Monday, the cash will be credited into the seller’s account by Tuesday and the stock will also be transferred to the buyer’s account by then. This move from the earlier T+2 settlement system was initiated in a phased manner from February 2022 onwards with batches of stocks and the associated derivatives being transferred to T+1. Stocks were collected into batches on the basis of market capitalisation and the movement to T+1 started with the lowest market capitalisation group. The last remaining set consisting of large caps and blue chips was transferred on Friday.
 

This is part of a consistent process where the Securities and Exchange Board of India (Sebi) has reduced the settlement period from T+3 days to T+2 days in 2002 and mooted the proposal to reduce it further to T+1 in 2020. India is the only large market apart from China to move to T+1 and, unlike China, India intends to fully transition all financial assets which are traded on the exchanges, including derivatives. A shortened settlement cycle also reduces the number of outstanding unsettled trades, and thus decreases the unsettled exposure and narrows the time-window for possible defaults. The reduction in settlement time also means reduced margin requirements and it is only possible due to a faster banking transfer system, the use of the Unified Payments Interface platform, and the higher penetration of online and app-based trading. The shift to digital in broking communication, dissemination, execution, and risk management has also catalysed the move to T+1.
 

This should reduce the float that lies blocked in brokerage accounts and it amounts to an average of Rs 30,000 crore per day. Sebi is also considering the implementation of a system like ASBA (application supported by blocked amount) for the secondary market to further reduce this float. Cutting down the risk of non-payment and non-delivery, and providing more liquidity could lead to increased trading volumes. The shorter cycle is, therefore, unequivocally positive for domestic investors, both institutional and retail, due to the promise of greater liquidity and reduced systemic risk. The past 11 months have ironed out possible glitches in the technical infrastructure and systems required.
 

However, there are reasons why most large international exchanges are uncomfortable about moving from T+2 (the international norm) to T+1, despite possessing the technical expertise and infrastructure. Overseas investors find it hard to handle a shorter cycle. Indeed, foreign portfolio investors (FPIs) had written to the market regulator, explaining their operational issues. Since they operate in different geographies, they have to contend with time-zone differences, the processes of information flow, and problems with foreign-exchange conversions. A T+1 sequence can make it difficult for FPIs to hedge India exposures in dollar terms on a daily basis and there could be margin issues also if they need to convert forex during off-banking hours in their home region. In effect, this could force FPIs with India exposures to keep large cash balances in their Indian accounts. This is the only area of concern in the large cap and associated derivatives segment where FPIs have the most exposures, and where the stocks concerned have highly liquid futures and options.