T+1: India’s markets get a turbo boost

It’s another first for the Indian capital markets and one we can justly be proud of.?

Starting 27 January, 2023, Indian markets will shift to the world’s fastest settlement cycle. Stocks that are bought and sold, will be settled on a ‘T+1’ or a trade-plus-one-day timeline. With this, India will probably be the second major market to have completely switched to a T+1 settlement cycle.?

What are the benefits of the T+1 system?

Assume a trader or investor buys a stock on Monday. In India, it will now reflect in their demat account on Tuesday. Earlier, the delivery of shares would happen after 48 hours. Thus, a T+1 cycle significantly reduces the risk from price fluctuations on a stock. It also helps investors manage their portfolios better.

For those who are selling stock, T+1 means they will get the payment for shares sold in their account in 24 hours. This means quicker access to liquidity, critical for those planning on re-investing their gains.?

On paper, this transition possibly looks like the easiest thing to do. But, it is not. In fact, this transition is yet another instance of the audacity with which SEBI, India’s market regulator, has consistently pushed the envelope when it comes to delivering on investor interest.?

How did India transition to T+1?

Transitioning to a T+1 settlement cycle means brokers have to change the infrastructure of their existing trading operations. They have to get approvals. The transition also has to account for the Foreign institutional investor who trades from different countries and at different time zones. A one-time transition would likely end in chaos. Which is probably why SEBI in its wisdom decided to implement a phase-wise transition.?

Phase 1 began in February 2022, when 100 stocks with the lowest market cap transitioned to the T+1 settlement cycle. Stocks were then added monthly to this list. By 27 January, over 5,200 stocks would have shifted to this new regime in under 365 trading days. The world, of course, will watch closely to see how an ‘emerging economy’ will tide over time zone differences.

A tall order, but not unusual for a country which is among the handful to have a completely dematerialised trading system. India introduced demat accounts way back in 1991 and made it mandatory in 1996. To put this in perspective, worldwide, 100% demat coverage of all market participants is rare. Not even the US can boast of this.?

The T+1 settlement cycle, in our books, is as historic as India embracing Demat. It will provide investors with more liquidity and enable them to leverage investment opportunities faster. It has the potential to transform the stock market dynamics in its full-scale implementation, and further boost equity participation in the country.

Thus, to say that the opening bell on 27 January, 2023 will ring in a new era for India’s investors and its stock markets wouldn’t be wrong. Onwards and Upwards.