The markets regulator Securities and Exchange Board of India (SEBI) has allowed the stock markets to introduce T+1 settlement cycle from next year onwards. As of now, it takes T+2 to transfer the money and shares after a transaction.
Since Indian stock markets follow the T+2 settlement cycle, the sellers of shares do not expect payment within two days after the transaction.
In the first week of September 2021, SEBI announced that the stock markets can voluntarily follow the T+1 settlement cycle from next year. The markets regulator has also announced that the stock markets must give one month’s notice before introducing the shift in settlement from T+2 to T+1. The exchanges are also expected to publicise the change on their website.
What is T+2?
In case of stock market trading, it is important to know two dates: transaction date and settlement date. On the transaction date, a buyer buys stocks from a seller and makes the payment. However, the actual transfer of shares takes a total of two days, thus pushing the settlement of trade by two days, also known as T+2.
In other words, if a trader buys stocks on Wednesday, they will become the shareholder only on Friday, i.e. two days after the transaction. After the T+2 period is shortened to T+1, the settlement will take just one business day.
For example, when an investor buys 100 shares of Asian Paints on Monday, he will not become a shareholder that day itself. Although his broker will debit the account on Monday, he will become a shareholder on Wednesday, i.e. two business days after the transaction takes place. After the new rules are introduced — the investor will become a shareholder and the seller will receive the money on Tuesday itself, i.e. only one business day after the transaction.
Before introducing this change, SEBI sought suggestions from various stakeholders such as stock exchanges, depositories and clearing corporations.
To put the new systems in place, all these institutions were instructed to roll out necessary changes to their rules, bye laws and technology. It is important to note that the change is voluntary and the stock markets are not mandated to introduce it.
The new rules that are in the pipeline are believed to be the need of the hour. The stock brokers and financial technology firms have been pushing for some time to bring this change to allow a faster turnaround.