T+1 Settlement Cycle: Explained!

T+1 Settlement Cycle

After nearly 20 years, the T+2 settlement cycle has been reduced to the T+1 settlement cycle. Let’s explore how it will benefit investors!

What’s Happening?

When it comes to defining settlement cycles, we have come a long way. You won’t believe that before 2001, we used to follow a fixed settlement cycle. So, if you had bought a share on BSE, the settlement would take place on Fridays. Whereas, if you had bought a share on NSE, the settlement would take place on Tuesdays.

Later SEBI introduced a settlement cycle which included the day you had bought the share and introduced ‘T’ as the trading day. 

Since then, we have evolved from T+3 days settlement cycle to T+2 days, and today we are standing at a T+1 day settlement cycle. 

What is T+1 Day Settlement, and Why is it Introduced?

Major markets like Singapore, Hong Kong, Australia, Japan, and South Korea follow the T+2 days settlement cycle. China has moved ahead to a partly T+1 settlement cycle. But India is the first country to fully move to the T+1 settlement cycle. This new settlement cycle means that if you buy a share today, it will get credited into your Demat account the next day. And if you sell your stocks, you will get the funds credited into your trading account the next day. 

According to the Economic Times, the Indian stock market has been gradually migrating stocks to the new T+1 settlement cycle in a few phases. From 27th January 2023, the final batch of 256 stocks has shifted to the T+1 settlement cycle. 

It has been observed that over the last two years, we have seen a massive increase in the number of retail investors from four crores in March 2020 to an impressive ten crores in August 2022. As more and more retail investors are associating with the stock markets, a faster settlement cycle will ensure enhanced liquidity in the hands of investors. It will improve the trading atmosphere for retail investors. 

In short, if you sell the shares, you will get your money credited in a day. And if you buy a share, you will get the delivery of shares in a day. It’s a win-win situation for both buyers and sellers. 

Are Instant Settlement Cycles Possible?

Since the T+1 settlement cycle was introduced, people have been talking about if instant settlement is possible. 

Yes, if SEBI comes up with a development where if you place a Cash and Carry (CNC) order, then your delivery might be credited into your demat account instantly. But, coming up with an instant settlement cycle will need a lot of time and effort. 

What’s Next?

With this new change, Foreign Portfolio Investors (FPIs) will face challenges because they invest in India from different countries and time zones; hence a shortened cycle could impose challenges in getting necessary approvals for stock transfers and their respective custodians or head offices. However, the FPIs have reconciled with the T+1 settlement cycle. 

The US market is also moving to the T+1 settlement cycle in the upcoming months. 

That’s it for today. Don’t forget to share the newsletter with your friends.

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