Sebi allows T+1 settlement cycle on optional basis

Comes into effect from Jan 1; FPIS stare at challenges

The Securities and Exchange Board of India (Sebi) has introduced an optional T+1 settlement cycle for the markets. T+1 means that settlements will have to be cleared within one day of the actual transactions taking place.

The regulator has put the onus on the stock exchanges to decide whether they want to opt for the shorter settlement cycle for any of the listed scrips. This can be done after giving a one-month prior notice to all stakeholders.

A switch to the T+1 settlement cycle is expected to benefit domestic investors by increasing market liquidity and trading turnover while reducing settlement risk and broker defaults.

Foreign portfolio investors (FPIS), however, are expected to face considerable operational challenges in adjusting to the new regime because of the difference in time zones, especially for the US and European investors.

"Sebi has been receiving requests from various stakeholders to further shorten the settlement cycle. Based on discussions with the stock exchanges, clearing corporations, and depositories, it has been decided to provide flexibility to the stock exchanges to offer either T+1 or T+2 settlement cycle," said a note from the regulator on Tuesday.

The provisions of the circular come into effect from January 1, 2022.

Currently, trades on the Indian stock exchanges are settled within two days, just like most major markets such as Singapore, Hong Kong, Australia, Japan, and South Korea. Taiwan, which had switched to T+1 settlement, has moved back to the T+2 cycle. "Domestic investors will be in favour of moving to the T+1 system. The offshore investors, however, will face an issue," said a person familiar with the matter.

According to him, the exchanges may initially try to move 5, 10 or 15 scrips that are outside of the key benchmark indices such as the Nifty 50 and the Sensex to the T+1 cycle.

After opting for the T+1 settlement cycle for a scrip, the stock exchange will have to mandatorily continue with the same for a minimum period of six months. After that, in case the exchange intends to switch back to the T+2 settlement cycle, it will do so by giving one-month advance notice to the market. Any subsequent switch (from T+1 to T+2 or vice versa) will be subject to the minimum notice period. There will be no netting between T+1 and T+2 settlements.