From UPSC perspective, the following things are important :
Prelims level : Account settlement, T+1
Mains level : Not Much
After China, India will become the second country in the world to start the ‘trade-plus-one’ (T+1) settlement cycle in top-listed securities today.
What’s the T+1 settlement plan?
- The T+1 settlement cycle means that trade-related settlements must be done within a day, or 24 hours, of the completion of a transaction.
- For example, under T+1, if a customer bought shares on Wednesday, they would be credited to the customer’s demat account on Thursday.
- This is different from T+2, where they will be settled on Friday.
- As many as 256 large-cap and top mid-cap stocks, including Nifty and Sensex stocks, will come under the T+1 settlement from Friday.
What was the earlier settlement system?
- Until 2001, stock markets had a weekly settlement system.
- The markets then moved to a rolling settlement system of T+3, and then to T+2 in 2003.
- In 2020, Sebi deferred the plan to halve the trade settlement cycle to one day (T+1) following opposition from foreign investors.
What are the benefits of T+1?
- T+1 system brings operational efficiency, faster fund remittances, share delivery, and ease for stock market participants.
- In the T+1 format, if an investor sells a share, she will get the money within a day, and the buyer will get the shares in her demat account also within a day.
- The shorter trade settlement cycle augurs well for the Indian equity markets from a liquidity perspective.
- This will also help investors in reducing the overall capital requirements with the margins getting released on T+1 day, and in getting the funds in the bank account within 24 hours of the sale of shares.
- The shift will boost operational efficiency as the rolling of funds and stocks will be faster.
Issues with T+1 system
- T+1 is being implemented despite opposition from foreign investors.
- The United States, United Kingdom and Eurozone markets are yet to move to the T+1 system.
Why are foreign investors opposed?
- Foreign investors have some operational issues as they operate from different geographies.
- Among the issues raised by them were time zone differences, information flow processes, and foreign exchange problems.
- Foreign investors said they would also find it difficult to hedge their net India exposure in dollar terms at the end of the day under the T+1 system.
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