Explainer: T+1 settlement cycle India is moving into from today

India becomes the second country in the world today after China to start the ‘trade-plus-one’ (T+1) settlement cycle in top listed securities.
This is aimed at bringing operational efficiency, faster fund remittances, share delivery, and ease for stock market participants.
The shorter trade cycle is considered good for investors and encourages trust among them.
The complete shift to the T+1 settlement cycle was rolled out in 2022, starting with select stocks and the goal was to bring others into the fold.

What is ‘T+1’ settlement?

It essentially means that a transaction on the back of any purchase or sale of securities will reflect the next day in the demat account of the investor.

How it happened earlier

Trade settlement used to take place on a ‘T+2’ basis, meaning that the securities bought or sold by an investor will reflect in his/her demat account after two days.

Advantage

By reducing the number of days for settlement, it will offer more liquidity to investors and may improve trade and participation.

Risks

Settling trades could be challenging if there are downtimes for a bank, especially a large bank.
A higher volatility in capital markets could pose a contagion risk to the ecosystem.

Global practices

Most international markets — including the US, Europe, and Japan — are still under the ‘T+2’ settlement cycle.

Implementation by exchanges

The first phase of implementation began in February, 2022, in 100 stocks with the lowest market capitalization, and thereafter, gradually stocks were added month after month.
There are a total of 256 stocks in the last batch to move to the ‘T+1’ cycle. These include all the stocks that are part of the Nifty 50 and Sensex.