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Indian bourses to introduce T+1 settlement from February 2022: What it means

The Indian equity market is preparing to move to the trading plus one day (T+1) settlement cycle, which would make it the world’s fastest stock market.

From February 25, 2022, delivery transactions of the equity market will be settled in less than 24 hours. Meaning the buyer will get the shares to their account and the seller will receive the payment in less than 24 hours. In the present T+2 system, which is followed by most markets around the world, transactions are settled in less than 48 hours. Moving to a shorter settlement cycle aims to improve liquidity and mitigate the risk of defaults.

Exchanges have said they will roll out the feature for the bottom 100 stocks, and the next batch of bottom 500 and move up. The bourses expect to start the T+1 cycle for Nifty stocks in 2023.The Securities Exchange Board of India (SEBI) had through a circular on September 7, 2021, directed exchanges to implement the T+1 settlement cycle from the January 1, 2022. However, concerns were voiced by several foreign portfolio investors (FPIs), which work in various time zones globally. Brokers and custodians said the rollout of the T+1 system will need adequate preparations to ensure FPI transactions go through seamlessly, right from conversation of foreign currency to local currency to purchase and sale of stock to repatriation of funds.

This also meant that the broker's back office has to be functional well beyond its working hours.  The foreign investors would also find it difficult to hedge their net India exposure in dollar terms at the end of the day under the T+1 system. The banking hours do not match the overseas banking hours.As a result, brokers requested SEBI to postpone the timeline of rollout, after which the deadline was moved to February 25 next year.

Below is the list of stocks which is going into T+1 settlement cycle.

In the new system, the exchanges will jointly introduce the T+1 cycle based on market capitalisation. The present form of implementation in phases will begin on February 25, 2022, wherein the 100 stocks with the lowest market capitalisation will fall under T+1 settlement. Subsequently, from March 2022 on the last Friday (in case of a holiday on the next trading day) of every month, the next 500 scrips with the lowest market capitalisation will fall under the T+1 cycle.

In the original announcement, the regulator had directed stock exchanges to decide whether they want to opt for the shorter cycle for any of the listed scrips. Also, once an option was exercised, it was not be changed for the next six months. A notice of one month had to be given before moving to the T+2 cycle. But allowing exchanges to introduce T+1 optionally on stocks would have resulted in problems as various exchanges would have taken different decisions.

With this phased manner of implementation based on market capitalisation, FPIs can breathe easy as the FPIs trades based on companies falling at the top end of the market capitalisation. This gives them enough time to test, codify and implement the system. The FPIs need not worry until October-November 2023. For domestic participants, T+1 will improve market liquidity and mitigate default risk and enhance trading volumes of the exchanges.