T+1 settlement to come into force in India this week: Is D-Street prepared for it?

Most market experts expect the shift to a shorter trade settlement cycle in the Indian equity market to be smooth, given the phased implementation of the same by stock exchanges. However, they will be watchful of the impact on index stocks given the high volume trades in them.

The shorter trade settlement cycle will come into force for all the listed securities in the Indian equity market from Friday.

In India, trade settlement used to take place on a ‘T+2’ basis, meaning that the stocks bought or sold by an investor will reflect in his/her demat account after a period of 2 days. However, capital market regulator Securities and Exchange Board of India decided to shorten it to ‘T+1’ following requests from various stakeholders.

Reducing the number of days for settlement will help provide better liquidity to investors and thereby enhance trade and participation.

The stock exchanges implemented the new settlement cycle in a phased manner in order to avoid any disruptions, because such a move would require changes to the infrastructure set up for brokers.

The move to shift to a shorter trade settlement cycle will be a key milestone in the history of Dalal Street.

India will be the second largest market after China to implement the ‘T+1’ settlement cycle of stocks. Most international markets such as the US, Europe are still under the ‘T+2’ settlement cycle.

“It is a good model which will help in protecting the investors’ interest,” said B Gopkumar, MD and CEO of Axis Securities.

“We think it would be better if this model develops like the IPO model, where ASBA for bank brokers is available along with the UPI method… This measure will ensure that the customer success ratio is higher since the hops in the transaction are not there,” Gopkumar said.

Deven Choksey of KRChoksey Shares and Securities expects the implementation of the new settlement cycle to be smooth given that technologically, the systems are equipped to handle it. Most of the analysts, while being positive about the development, said that it will be a wait-and-watch situation in the initial period, as one needs to see how it plays out when large volumes of trade take place.

“The last batch that is due for getting shifted to the T+1 cycle post this expiry represent stocks with among the highest volume; so the story is yet to unfold,” said Anand James, chief market strategist at Geojit Financial Services.

The shorter payment and settlement cycles augur well for the trading ecosystem, but the last 15 days may not be a right period for gauging this, as COVID and rate hike fears, as well as budget blues kept risk appetite to a trickle, James said.

According to Gopkumar, there could be teething issues, though this is a sound methodology in the long term.

“The challenges would exist in case there are any downtimes for a bank or a large bank. Any downtime in any large bank and a volatile capital market would pose a contagion risk to the ecosystem,” he said.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)