India moves to T+1 settlement from Feb 25. Here's what it means

This means that trade-related settlements must be done within one day of the transaction's completion.

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.

Indian exchanges, however, will be moving to T+1 settlement from February 25 in a phased manner.

T stands for trade day. Here is the lowdown on what the shorter settlement cycle means:

What is the new T+1 settlement cycle?

T+1 means that trade-related settlements must be done within one day of the transaction's completion.

Trades on Indian stock exchanges are currently settled in two working days after the transaction is completed (T+2).

For example, if you buy shares on Wednesday, they will be credited to your demat account by the next day, which is Thursday.

Till now they were getting settled on Friday.

Will it be a gradual transition?

Initially, on the last Friday of February, only 100 stocks that are placed at the bottom according to their market valuation will be placed under the new settlement cycle.

After that, 500 more stocks will be added every last Friday of subsequent months, until every stock is placed under the new settlement system.

What are the benefits?

T+1 settlement system will shorten the settlement cycle which will reduce the risk of default and will increase the liquidity in the market with availability of funds.

"We may see an increase in trading volume as the funds will be free within one day," said Vijay Dhanotiya, Lead Technical Research at CapitalVia Global Research.

"T+1 settlement system will shorten the settlement cycle by a day reducing risk of pay-in/pay-out defaults, lower margin requirements and give investors more liquidity with availability of funds and securities," said Anupam Agal, head operations & legal, Motilal Oswal Financial Services.

Will there be any hurdles?

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

The investors have asked the clearing corporations to push the deadline for equity trade confirmations to 9 a.m. on T+1 day.

They have also requested a single trade confirmation deadline for both institutional and non-institutional clients.

Once the shorter settlement cycle kicks in, forex will have to be necessarily booked either late in the evening of trade day or early morning the next day.

This may pose some challenges as well.

Can exchanges go back to T+2 settlement?

After opting for the T+1 settlement cycle for a scrip, stock exchanges have to continue with the same for a minimum  of six months.

After that, the stock can be moved back to the T+2 settlement cycle by giving a month's notice to the market.

Which other markets operate on T+1?

China is the only market of significant size and scale which operates on a shortened settlement cycle (T0/T+1).

The US market is also in the process of moving to T+1 in the coming months.