Stock exchanges to start T+1 settlement cycle from Feb 25, 2022 in phases

Bottom 100 stocks by m-cap to be transitioned first, followed by next bottom 500 stocks in March 2022; phase-wise transition to give all market participants, including FPIs, time to shift

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stock exchange | SEBI | NSE

India’s stock exchanges have decided to jointly introduce the T+1 settlement cycle in phases from February 25, beginning with the bottom 100 stocks by market capitalisation. From March 2022, on the last Friday (or the immediate next trading day) of every month, the next bottom 500 stocks by market cap will be subject to T+1 settlement. The phase-wise implementation is expected to give all market participants, including foreign portfolio investors, ample time to shift to the shorter cycle. The Securities and Exchange Board of India (Sebi) had, on September 7, permitted Stock exchanges to introduce T+1 settlement cycle from January 1 on any of the securities available in the equity segment on an optional basis. This had led to concerns that the same security could be on a T+1 settlement cycle on one exchange and T+2 on the other, leading to unnecessary operational complexity and risk in the settlement system. The systems currently used by FPIs and their service providers, for instance, do not have the capability to code for different settlement cycles in the same market.

This would have made it operationally challenging to track and manage which securities are settling T+1 versus T+2.

As per the announcement on Monday, all listed stocks across stock exchanges – BSE, NSE and the MSEI – shall be ranked in descending order based on daily market capitalization averaged for month of October 2021. Where a stock is listed on multiple exchanges, the market capitalization will be calculated based on the price of stock at the stock exchange with highest trading volume during the above-mentioned period. Any new stock getting listed after October 2021 account of initial public offering (IPO), corporate action or any other reason shall be added to the list based on the market capitalization calculated on the basis of average trading price of 30 days after commencement of trading. Securities such as Preference shares, Warrants, Right entitlements, Partly paid shares and securities issued under differential voting rights (DVR) will be transitioned to T+1 settlement along with the stock of parent company. All other securities in the equity segment of exchanges–including closed-end mutual fund schemes, debt securities and real estate investment trusts–will move to the T+1 settlement cycle along with the last scheduled batch of securities. FPIs had earlier urged Sebi to defer the January 1 deadline so that all stakeholders get sufficient time to identify and test the operational processes required to safely implement the T+1 model. They had also raised concerns that compressed confirmation deadline due to time zone differences could result in more failed trades. Additional trade fails would lead to higher costs for FPIs, including regulated funds and their investors, besides making India a pre-funding market. Three out of five FPIs investing into the country come from outside Asia and the move to a shorter settlement cycle could hurt them the most. A switch to the T+1 settlement cycle is expected to benefit domestic investors by increasing market liquidity and trading turnover while reducing settlement risk and broker defaults.

Roadmap for T+1 settlement

• Exchanges to jointly introduce T+1 settlement cycle from February 25
• New norms to apply first to bottom 100 stocks by market capitalisation
• 500 more stocks from the bottom will be added every month till all stocks move to shorter settlement cycle
• Phase-wise implementation expected to give all market participants ample time to adjust to the shorter cycle
• FPIs had opposed the shift, citing time-zone differences, risk of trade mismatches, and issues with arranging forex on trade day