Exchange to Implement T+1 Cycle
Published by Sharekhan Education | March 5, 2022
Exchange to Implement T+1 Cycle
There are two major competing forces in the stock market – the buyers, and the sellers. Here, a transaction can only occur when a buyer is ready to buy a stock at precisely the same price the seller is willing to sell at. The transaction completes when the shares officially transfer to the buyer’s Demat account and the cash to the seller’s Demat account.
The Current System
Under the current system, the NSE & BSE follow the T+2 (Trade+2) settlement cycle. Here, it takes two days for the shares to get transferred to the buyer’s account after the purchase. For example, if someone buys/sells on a Monday, the shares/money will get credited to the account on Wednesday.
The Previous System
Before April 2003, the NSE and BSE followed the T+3 settlement system, where it took 3 days for the above process. It was only in April 2003 that SEBI decided to shorten the settlement cycle to T+2. And now SEBI is planning to go one step further.
The Upcoming System
SEBI is now planning to shorten the cycle to T+1, a move aimed at improving market liquidity. Implementing T+1 would require clearing all settlements related to trade within one day of the actual transaction taking place. For example, even if shares are bought or sold in the last half an hour of the market closing, it will ensure the delivery of shares into the buyer’s account and money into the seller’s account the very next day, making the system more efficient. When implemented, India will be the first country to follow the T+1 settlement cycle. The US and the UK markets still follow the T+2 settlement cycle.
Transitioning to the New System
The NSE and the BSE will transition to the new system in phases. The first batch of stocks to implement the T+1 settlement cycle will be the bottom 100 stocks in terms of market valuation or 100 stocks with the least market capitalization. Afterward, 500 stocks will be added monthly, following the same market valuation criteria, until all stocks are under the new settlement cycle. Stocks transitioning to the T+1 settlement cycle can expect credit of shares and money within 24 hours.
As per some experts, implementing the T+1 settlement cycle will be a boon to many since those transacting will get their money or shares delivered in less than 24 hours, thereby allowing the money to move faster without the extra wait. Reducing the margin requirement can enhance liquidity since the trading account margin will only be blocked for just one day. The T+1 settlement cycle can also reduce the risk of defaults. So long for now, until our team at Sharekhan Education is back again with another nugget of wisdom.
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