Circular No. SEBI/HO/MRD2/DCAP/P/CIR/2021/628
Dtd. 07th September, 2021
In the year 2003, SEBI, vide circular no. SMD/POLICY/Cir -/03 dated February 6, 2003, shortened the settlement cycle from T+3 rolling settlement to T+2 w.e.f. April 01, 2003.
In line with the same, SEBI after near about 18 years has issued a circular to introduce a shorter settlement cycle. The settlement cycle is shortened after keeping in view the requests from various stakeholders and discussions with Stock Exchanges, Clearing Corporations and Depositories.
With the advent of the same, it has been decided to provide flexibility to Stock Exchanges to offer either T+1 or T+2 settlement cycle.
The change to a shorter cycle is likely to benefit retail investors, who will get quicker access to cash and securities after trades are executed. It will also reduce the risks associated with fluctuations of stocks during the settlement cycle.
The proposed T+1 settlement cycle will, however, not be mandatory, with exchanges retaining the option to continue to offer the T+2 settlement cycle.
Applicability: The provisions of this circular shall come into force w.e.f. 1st January, 2022.
Opting T+1 settlement cycle: A Stock Exchange may choose to offer T+1 settlement cycle on any of the scrips, after giving an advance notice of at least 1 month, regarding change in the settlement cycle, to all stakeholders, including the public at large, and also disseminating the same on its website.
Minimum period: After opting for T+1 settlement cycle for a scrip, the Stock Exchange shall have to mandatorily continue with the same for a minimum period of 6 months.
Switching back: In case, the Stock Exchange intends to switch back to T+2 settlement cycle, it shall do so by giving 1-month advance notice to the market.
Netting: There shall be no netting between T+1 and T+2 settlements.
(Netting is a method of reducing risks in financial contracts by aggregating multiple financial obligations to arrive at a net obligation amount.)
For example, if a security is placed under T+1 settlement on a Stock Exchange, the regular market deals as well as block deals will follow the T+1 settlement cycle on that Stock Exchange.
The stockbrokers’ lobby group, Association of National Exchanges Members of India (ANMI), had earlier raised concerns on implementation of T+1 settlement system. “The window will be too short for securities lending and borrowing to practically work, and there could be spill over,” ANMI said in a letter to SEBI on 28th August, 2021.
Several operational and technical challenges would need to be tackled before implementing the T+1 settlement system. At present, the infrastructure available with market infrastructure institutions is not able to efficiently meet timely issuance of pay-in and pay-out and to send files on time, it said. Besides operational and technical challenges, implementing the new system will increase working capital requirements for brokers and extended working hours for banks and depository participants, ANMI said.
It also pointed out that global investors will face difficulties in a short cycle of settlement as securities settlement of FPIs is operationally very complex, involving coordination among multiple entities such as fund managers, global and local custodians, brokers, clearing members, and exchanges. “If the settlement of T+1 is adopted, the MSCI country classification methodology may look at it negatively as it is likely to result in Indian market being a pre-funded market. This may result in a drop in the weightage to India in its MSCI emerging market Index. This will adversely affect flows,” ANMI had said.
Direction to Market Infrastructure Institutions: The SEBI has directed Stock Exchanges, Clearing Corporations and Depositories to take necessary steps to put in place proper systems and procedures for smooth introduction of T+1 settlement cycle on optional basis, including necessary amendments to the relevant bye-laws, rules and regulations.