Share Settlement Cycle In Indian Stock Market: Even as India has already become the first country to completely shift to ‘T+1’ (trading day plus one) settlement system in the stock market, markets regulator Sebi is now planning to move to even faster settlements. It plans to enable 1-hour settlement of share purchases in demat accounts by the end of 2023-24, before shifting to the ambitious instant settlement system.
T+1, T+2, Instant Settlement, 1-Hour Settlement: Explained
In the stock market, when shares are purchased through any exchange like BSE and NSE, the shares are not immediately transferred into the buyer’s demat account. It currently takes one day to settle shares in demat. For instance, if you buy shares today, the shares will be transferred into your demat the next day — tomorrow. However, you can sell the shares even before they get transferred into your demat account. Demat account is an account where shares are kept digitally.
T+1 means trading day plus one. The trading day is the day when shares are purchased. In the T+1 settlement system, it will take one day to settle. It is currently followed in India. Likewise, in T+2, shares are reflected into demat within two days of share purchase. For instance, if shares are purchased on Monday, they will be reflected into demat on Wednesday.
In 1-hour settlement system, shares will be transferred into the demat account after 1 hour of purchase. In the instant settlement, the shares will be transferred into demat account immediately.
From Weekly Settlement System To ‘T+1’ in Stock Market: India’s Case
The Indian share market fully shifted to a shorter (T+1) trading cycle from January 27, making the country the first in the world to do so. Before that, the domestic equity market followed the T+2 settlement cycle, which means if you buy a share on Monday, it will be credited into your demat account on Wednesday (T+2). With the T+1 trading settlement system from January 27, investors are now able to get the shares in their demat accounts and sell them the next day (Tuesday, in this case).
The T+2 settlement system was introduced in India in 2003, after Sebi had moved the stock markets from an earlier rolling settlement of ‘T+3’, which was in practice from 2001. Before 2001, the Indian stock market had a weekly settlement system.
Why Shorter Settlement Cycles?
Experts said that shorter settlement cycles allow quicker liquidity and reduce the possibility of default, thus improving market efficiency.
A faster share settlement system will also enable mutual funds (MFs) to settle the redemption requests of investors much faster, thus increasing the velocity of money. Faster settlement cycles improve the efficiency of capital markets with all participants benefitting from it, the experts say.
Do Mutual Funds Also Follow The Same Settlement System As Stock Market?
No. Mutual funds are a day late in settlement as compared with the stock market. When the stock market followed the T+2 settlement cycle, equity mutual funds had T+3 settlement cycle. This is because mutual fund houses invest in stocks a day after they receive payment from the markets.
