India’s stock exchanges have decided to jointly introduce the T+1 settlement cycle in phases from February 25, beginning with the bottom 100 stocks by market capitalisation.
From March 2022, on the last Friday (or the immediate next trading day) of every month, the next 500 stocks from the bottom will be subject to T+1 settlement. The phase-wise implementation is expected to give all market participants, including foreign portfolio investors (FPIs), ample time to shift to the shorter cycle.
The settlement cycle represents the time period within which the stock exchanges have to settle security transactions. T+1 means settlements will have to be cleared within one day of the actual transactions taking place.
The Securities and Exchange Board of India (Sebi) had on September 7 permitted the exchanges to introduce the T+1 settlement cycle from January 1 on any security available in the equity segment on an optional basis.
This had led to concerns that the same security could be on the T+1 settlement cycle on one exchange and T+2 on the other, which could cause unnecessary operational complexity and risk in the settlement system.
The systems currently used by FPIs and their service providers, for instance, do not have the capability to code for different settlement cycles in the same market. This would have made it operationally challenging to track and manage which securities are settling T+1 versus T+2.
Some of the global custodians, through which a large number of FPIs transact, welcomed the exchanges’ move.
“It’s a positive development, especially given that FPIs, brokers, and banks need more time to develop and implement necessary systems, cash flows, and forex management,” said Akshay Thakurdesai, director, head of securities services India, BNP Paribas. “The clear guidelines prescribed in today’s release in terms of security classifications on all the exchanges will ensure a smoother and holistic transition to T+1,” he said.
Sriram Krishnan, co-head – global transaction banking, Deutsche Bank India, said, “This is hugely positive as it eliminates all previous uncertainties and, at the same time, provides FPIs with over a year to get ready for the same, given that they largely trade only in the top 500 stocks.”
According to the announcement on Monday, all listed stocks across the BSE, NSE and MSEI shall be ranked in descending order based on daily market capitalisation averaged for the month of October 2021. Where a stock is listed on multiple exchanges, its market capitalisation will be calculated based on its price at the stock exchange with the highest trading volume during this period.
Any new stock getting listed after October 2021 on account of initial public offering (IPO), corporate action or any other reason will be added to the list based on the market capitalisation calculated on the basis of average trading price of 30 days after the commencement of trading.
Securities such as preference shares, warrants, right entitlements, partly paid shares, and securities issued under differential voting rights (DVR) will be transitioned to T+1 settlement along with the stock of the parent company.
All other securities in the equity segment of the exchanges — including closed-ended mutual fund schemes, debt securities and real estate investment trusts — will be transitioned to the T+1 settlement cycle along with the last scheduled batch of securities.
FPIs had earlier urged Sebi to defer the January 1 deadline so that all stakeholders get sufficient time to identify and test the operational processes required to safely implement the T+1 model.
They had also raised concerns that a compressed confirmation deadline due to time zone differences could result in more failed trades. Additional trade failures would lead to higher costs for FPIs, including regulated funds and their investors, besides making India a pre-funding market.
Three out of five FPIs investing into the country come from outside Asia and the move to a shorter settlement cycle could hurt them the most.
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.