Sebi likely to defer T+1 settlement cycle, opt for phase-wise transition

The Securities and Exchange Board of India (Sebi) is likely to defer and tweak the diktat on implementing a T+1 settlement cycle.

The settlement cycle may now be implemented in a phased manner, following representations from foreign investors, and may apply only to the bottom 100 companies starting February 25, according to reports. 

The provisions of the circular, which were supposed to take effect from January 1, 2022, are facing stiff resistance from foreign portfolio investors (FPI), who have cited time zone differences, risk of trade mismatches and issues with arranging forex on trade day as reasons that could hamper a smooth transition to the shorter settlement cycle. 

Currently, trades on Indian stock exchanges are settled within two days, just like most major markets such as Singapore, Hong Kong, Australia, Japan, and South Korea. Taiwan, which had switched to T+1 settlement, has moved back to the T+2 cycle.

According to experts, moving stocks within the key benchmark indices such as the Nifty 50 and the Sensex to the 

T+1 cycle could prove risky if liquidity dries up and if FPIs halt trades. 

According to the regulator's new plans, bottom 100 stocks by market capitalisation will be added first to the shorter settlement cycle, following which 500 more stocks from the bottom will be added every month till all stocks eventually move to the shorter settlement cycle. 

This will give sufficient time for the systems and market infrastructure institutions to adjust to the new cycle. FPIs will get ample time for the transition as well as they typically trade in top 200 stocks. 

According to the current diktat, after opting for the T+1 settlement cycle for a scrip, stock exchanges will have to mandatorily continue with the same for a minimum period of six months. After that, in case the exchange intends to switch back to the T+2 settlement cycle, it will do so by giving one-month advance notice to the market. Any subsequent switch (from T+1 to T+2 or vice versa) will be subject to the minimum notice period. 

China is the only market of significant size and scale which operates on a shortened settlement cycle (T0/T+1). The Indian market had migrated to T+2 in 2003 under the then Sebi Chairman G N Bajpai.