Note4Students

From UPSC perspective, the following things are important :

Prelims level: Account settlement, T+1

Mains level: Not Much

settlement

After China, India will become the second country in the world to start the ‘trade-plus-one’ (T+1) settlement cycle in top-listed securities today.

What’s the T+1 settlement plan?

The T+1 settlement cycle means that trade-related settlements must be done within a day, or 24 hours, of the completion of a transaction.
For example, under T+1, if a customer bought shares on Wednesday, they would be credited to the customer’s demat account on Thursday.
This is different from T+2, where they will be settled on Friday.
As many as 256 large-cap and top mid-cap stocks, including Nifty and Sensex stocks, will come under the T+1 settlement from Friday.

What was the earlier settlement system?

Until 2001, stock markets had a weekly settlement system.
The markets then moved to a rolling settlement system of T+3, and then to T+2 in 2003.
In 2020, Sebi deferred the plan to halve the trade settlement cycle to one day (T+1) following opposition from foreign investors.

T+1 system brings operational efficiency, faster fund remittances, share delivery, and ease for stock market participants.
In the T+1 format, if an investor sells a share, she will get the money within a day, and the buyer will get the shares in her demat account also within a day.
The shorter trade settlement cycle augurs well for the Indian equity markets from a liquidity perspective.
This will also help investors in reducing the overall capital requirements with the margins getting released on T+1 day, and in getting the funds in the bank account within 24 hours of the sale of shares.
The shift will boost operational efficiency as the rolling of funds and stocks will be faster.

T+1 is being implemented despite opposition from foreign investors.
The United States, United Kingdom and Eurozone markets are yet to move to the T+1 system.

Foreign investors have some operational issues as they operate from different geographies.
Among the issues raised by them were time zone differences, information flow processes, and foreign exchange problems.
Foreign investors said they 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.