While this is going to make the markets less risky and help churn capital faster, it also comes with some logistical challenges.
Here are 8 things that you must know about the modified T+1 settlement cycle system.
1. Will the participation in T+1 settlement be voluntary or mandatory?
The participation in T+1 settlement cycle will continue to be voluntary as announced previously by SEBI. Companies will have to make a choice to shift from the T+2 settlement cycle to the T+1 settlement cycle. However, once this choice is exercised and the shift made, companies are required to stay in the new system for a minimum period of 6 months. The T+1 and T+2 settlement systems will operate parallelly in the stock markets.
2. When is the new T+1 settlement system going to be implemented?
In the original announcement made by SEBI, the new T+1 system was to go live from 01-Jan. However, in order to give traders, DPs and custodians more time to adjust to the new system, the T+1 shift will be implemented from 25-February. The February F&O contracts expire on 24-Feb and the new system of T+1 settlement will be implemented from next day.
3. What are the stocks that will be included in the T+1 system?
This is where one of the major change is coming in the T+1 implementation. Unlike in the original model, T+1 eligibility will not be for all stocks. Instead, T+1 settlement will start with the smallest stocks in terms of market capitalization. All listed stocks across BSE and NSE will be ranked descending on market cap values and the bottom 100 stocks will be selected.
In the first phase, these 100 stocks will be eligible for T+1 settlement, although the choice will still be at the discretion of the company. Then each Friday after the F&O monthly expiry, a total of 500 stocks from the progressively higher market cap bracket will be eligible. In case, the stock is listed on both exchanges, the exchange with higher average volumes will be considered.
4. When will Nifty and Sensex stocks to enter the T+1 eligible list?
The Nifty and the Sensex are the stocks with the highest market cap in the market and hence it be the last to enter. It is estimated that the NSE-500 and BSE-500 stocks will start entering the T+1 eligible list after November 2022 and the entire process of addition should be completed by Feb-23. Hence, the most liquid Nifty and Sensex stocks would only enter the T+1 eligible list by Feb-23.
5. What are the major countries that are on T+1 settlement cycle?
Currently, India is likely to be the first major stock market to move to the T+1 settlement cycle. The US is planning to shift entirely to T+1 system in 2 years. Across Asia, most key markets like South Korea, Japan, Australia, Singapore, Hong Kong and Thailand operate on T+2 basis. Taiwan was one of the few markets to shift to T+2 but reverted to T+1. India will be the first major market to transition to T+1.
6. How will IPOs be added to the T+1 eligible list?
In all the cases, the reference point will be the market cap and the volume of trade in Oct-21. However, for IPOs that are listed after Oct-21, the data of one month after listing date will be considered to figure out where the company stands in terms of market cap ranking and shifting to the T+1 system.
7. What about T+1 shift in case of DVRs, bonds, G-Secs, REITs and INVITs?
In the case of differential voting rights (DVR) shares and preference shares, they will move along with the main company moving to T+1 settlement. Regarding other securities like debt paper, G-Secs, Real Estate Investment Trusts (REITs) and INVITs, they will transition along with the last batch of additions to the T+1 list.
8. Will T+1 benefit retail investor and why are FIIs opposed to T+1?
Retail and small investors will gain from the T+1 system. When the settlement shifts to T+1, the money and stocks get churned faster and reduces their cost. It will also make BTST and STBT a lot simpler. Of course, it remains to be seen how the absence of cross margining between T+1 and T+2 impacts volumes.
In the case of FPIs, one constraint pointed out is time-zone differences. Most FPIs handle their India desks out of Singapore or Hong Kong and they need to hedge their net exposures for currency risk. However, FPIs are already hedging currency risk in F&O exposures, which has been operating on T+1 for a long time. Hence, it should not pose any major challenge.