After the inclusion of the last 256 large-cap and blue-chip stocks, the Indian market has become the first in the world to completely migrate to a shorter trade settlement cycle T+1 days. With the T+1 trading settlement system, investors will now be able to get the shares in their demat accounts and sell them the next day as against the next day earlier. Although the T+1 settlement cycle is not directly applicable on mutual funds, it will benefit the industry, according to experts.
The current ‘Trade Plus Two’ (T+2) settlement system was introduced in 2003, after the markets regulator 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.
Divam Sharma, founder at Green Portfolio, said, “This is a truly remarkable achievement as India will be the first market to achieve a complete T +1 trading settlement. Even the US has not been able to achieve this yet.”
V K Vijayakumar, chief investment strategist at Geojit Financial Services, said the Indian capital market has been in the forefront of modernisation and best practices for many years now, thereby becoming a model worthy of emulation for emerging markets.
“Now, with the initiation of the shorter settlement cycle of T+1, which no other country except China has, the Indian stock market is becoming a trend setter for even developed countries. Since the change to T+1 is in a phased manner the transition will be smooth. Quicker liquidity and reduction of possibility of default under T+1 will improve market efficiency,” he added.
T+1 Impact On Mutual Fund Industry
Prasant Bhansaali, director of Mehta Equities, said, “T+1 settlement will enable MFs (mutual funds) to settle redemption request of investors much faster increasing the velocity of money. Faster settlement cycles improves the efficiency of capital markets with all participants benefitting out of it.”
So far, 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. As the stock market had T+2 settlement cycle, equity mutual funds had T+3 settlement cycle.
Pankaj Mathpal, MD & CEO of Optima Money Managers, said, “After the implementation of the T+1 settlement cycle in Indian stock market, we are expecting the announcement of T+2 settlement cycle for equity mutual funds in quick time.”
Mehta Equities’ Prasant Bhansaali said the Indian stock market is fully prepared for T+1 settlement, with both brokers and clients finding it more efficient. Upfront margin obligations on client has ensured that broker has substantial collections from clients before entering into transactions for clients.
“Even though collection from cheques still take more time but most of the fund movement between broker and client is electronic and settled on the same day,” Bhansaali said.
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