T+1 settlement: What it means for investors? Check how it works, why are FPIs opposing?

The concept of T+1 settlement per se is very good as it allows faster movement of funds and securities. Image: Reuters

By Ashish Rathi

T+1 settlement announced by SEBI currently allows exchanges an option to allow securities which they wish to on an optional basis by giving one month notice and once they move to T+1 settlement in particular security they need to continue in that for 6 months period. The concept of T+1 settlement per se is very good as it allows faster movement of funds and securities; and more liquidity in the hands of investors. Today if an investor sells on Thursday, he receives the money on Monday (T+2 working days). With T+1 settlement, it will be Friday itself.

From a retail investor perspective, it is very good, as it allows the early receipt of money, and early receipt of shares than the current settlement cycle. The retail brokerages also have processes set for it. Now shares are delivered to the clearing corporation on T day itself. Also since upfront collection of margins is also compulsory, these are already aligned for a T+1 settlement. Meeting settlement timelines is one of the very important functions of an efficient capital market. It reflects the country’s financial system and its image.

For T+1 to be successful, we need to understand that the entire ecosystem has to function in a seamless manner that too on a consistent basis. The ecosystem includes stockbrokers, depositories, depository participants, exchanges, clearing corporations, banks, clearing members. Most of them are dependent on technology. Any disruption in any of these can put settlements on hold since the time to react or rectify will be very less. It helps retail brokers since the understanding is that once T+1 is implemented, the margin requirements would go down since today margins are charged on the basis of a 2 day settlement period. Once it moves to T+1 margins would go down. The margin requirements for retail brokers would be less. And investors would have more liquidity in their hands.

However, currently in the short run, the optional basis for security and the exchange will have to be looked at since interoperability is also live. We will have to wait for more clarity. Moving the entire system to T+1 has its advantages, however, the entire ecosystem and infrastructure needs to be geared for it to make it happen on a consistent basis. Benefits are many in the long run, however, no room for any error or delay for all intermediaries as well as the Market Infrastructure Institutions (MIIs).

FPIs have already raised concerns on different time zones, information flow, pre-funding and increase in cost of trading.

China is the only large market which is currently on T+1 settlement. Taiwan seems to have moved to T+1 settlement and then had to move back to T+2 settlements. The US has also decided to move to T+1 settlement basis the news, however, they have defined a time period of 2 years to move it so that everything can be aligned accordingly.

(Ashish Rathi, Whole Time Director, HDFC Securities. Views expressed are the author’s own.)