India has the distinction of being the second country after China to usher in T+1 settlement of transactions on its bourses. Even the advanced European nations, the USA and Japan are lagging behind with T+2 being still followed in these countries. But the SEBI must be lauded for not making the switch all of a sudden in one stroke but in a phased manner.

In what can be described as a revolutionary move in the Indian stock market, the SEBI introduced rolling settlement in July 2001. Prior to this, the fixed settlement cycle (Fridays on BSE and Tuesdays on the NSE) was followed, which was beset with problems like poor delivery, distrust among traders and excessive liquidity in the hands of brokers all of which resulted in frequent defaults. The problem was compounded by share certificates being in physical or paper form in those days which naturally needed time for movement of share certificates from seller to his broker and then to the clearing house from where it moved to buyer’s broker before landing in the lap of the buyer.

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The introduction of Demat in 1996 was therefore the catalyst for speeding up settlements. SEBI overhauled the settlement system with the rolling cycle for each trade, with the contract beginning on the trading day itself, referred to as “T”. Initially, SEBI mandated settlement of transactions on T+5 In 5 business days from the date of the trade for certain scrips and then expanded mandate to all scrips by December 2001. As the new settlement process was assimilated smoothly, SEBI shortened the cycle to T+3 in April 2002 and further to T+2 from April 2003 and now to T+1 in phases.

To start with, T+1 was introduced for 100 stocks (with the lowest market cap) on February 25, 2022, the next 500 from March, and since then 500 stocks every month. The bottom stocks with fewer traders were chosen sensibly first so that they could be assimilated by everyone in the loop quickly.

From 27th January 2023 all transactions cash and even F&O settlement will happen in T+1 cycle. Completely with the final batch of 256 shares transiting to it on 27th January 2023. These include all the stocks that are part of the Nifty 50 and Sensex, such as Reliance Industries, Infosys, Tata Motors, Dr Reddy’s Laboratories, State Bank of India, major midcap stocks like Dabur India, Ambuja Cements, Tata Chemicals, PB Fintech, FSN E-Commerce, Delhivery, One97 Communications, among others. In other words, the difficult ones, as it were, are the last to migrate to the new order.

The SEBI has been even more cautious, rightly so, in moving to T+1 so as not to upset the smooth flow of transactions.

With the exponential growth of retail investors and with the UPI gateway functioning seamlessly on real-time basis, SEBI rightly feels that there should not be any problem in fund transfer from brokers to clients, and vice-versa. The demat accounts of individual investors have more than doubled in a little over two years to cross the 10-crore mark in August 2022, from four crore in March 2020. Quick settlement could help preempt the default risk of pay-in/pay-out for such voluminous transactions. The point is the seller should have access to cash he has handed over and the buyer the shares he has already paid for as quickly as possible. Now that is going to be in just one business day from the date of the transaction. The demat accounts will reflect this speedy settlement.

However, the brokers and other intermediaries who got to enjoy float (being in possession of clients’ money) were naturally the first to raise the banner of protest if not revolt. According to them, T+1 settlement involved the high cost of changing their back and front-office operations. Both wanted more time to adopt to the changes. Full marks to SEBI for opting for a phased roll-out to win over brokers’ and intermediaries’ resistance. Foreign portfolio investors (FPIs) too were against implementation of the T+1 settlement on the (specious) ground that FPIs invest in India from different countries and time zones and a shortened cycle could pose challenges in getting the necessary approvals for stock transfers and to complete procedures from their respective custodians or head offices. This fear was exaggerated considering the times we live in --real-time. With the click of mouse, funds can be transferred from one corner of the globe to another.

Full marks to the SEBI for these calibrated and seminal reforms.

—The author, S Murlidharan, is a CA by qualification, and writes on economic issues, fiscal and commercial laws. The views expressed in the article are personal.

Read his previous articles here

(Edited by : C H Unnikrishnan)