Something is going to change at NSE and BSE on Friday; the new T+1 stock settlement rules will come into effect in a phased manner from 25 February 2022. In a phased manner because the NSE and BSE are not going to implement it for all stocks and only select 100 stocks will be eligible for the T+1 rule in the initial days.
At present, NSE and BSE follow T+2 days settlement which means the settlement of funds and securities gets completed in two business days after the order is executed. In 2003, Sebi had reduced the settlement cycle from T+3 rolling settlement to T+2.
Any transaction at the equity exchange has a settlement cycle that includes the trade date, when an order is executed, and the settlement date when participants exchange cash for the transaction of shares.
This settlement cycle is completed when the buyer receives the stock and the seller receives the money.
The new T+1 (trade date plus one day) rule means that market trade-related settlements must be completed within one day of the transaction's completion. For example, if you buy shares on Wednesday, it will be credited to your Demat account by the next day, that is, Thursday.
"Initially, on the last Friday of February, only 100 stocks that are placed at the bottom according to their market valuation will be placed under the new settlement cycle," Vijay Dhanotiya, Lead Technical Research at CapitalVia Global Research, pointed out. "Thereafter, 500 more stocks will be added every last Friday of subsequent months, until every stock is placed under the new settlement system," he said.
How will it impact investors?
Analysts do not think the new rule will have any significant impact on the market. However, the trading volume may increase because of the quick availability of funds and also the risk of default in transactions will be reduced.
"T+1 Settlement system will shorten the settlement cycle which will reduce the risk of default and will increase the liquidity in the market with the availability of funds. We may also see an increase in trading volume as the funds will be free within one day," said Dhanotiya.
Anupam Agal, Head Operations & Legal, Motilal Oswal Financial Services believes the T+1 settlement system will shorten the settlement cycle by a day reducing the risk of pay-in/pay-out defaults, lowering margin requirements and giving investors more liquidity with availability of funds and securities.