SEBI has just put out this circular providing flexibility to stock exchanges to offer T+1 or T+2 settlement cycles for stocks. Today when you buy a stock, it gets credited to your Demat account after 2 days because it is a T+2 settlement. Similarly, when you sell stocks today the funds get credited after 2 days (T+2). What the above circular means is that soon the credit of shares or funds can be on the next day itself (T+1).
I guess the confusing bit now is, if one exchange opts for T+1 and the other for T+2, how will settlements happen. Today the same stocks trade on both the exchanges and there is interoperability (bought on one can be sold on another, and vice versa). We will have to wait and see how this works out. In any case, this circular comes into effect from Jan 1st 2022.
If the above link doesn’t load, you can view the circular by clicking below.
Hello sir. Does this mean we can now pledge t+1 cash holdings for margin in FnO? Since settlement will be done t+1. How long will zerodha pledging system take to make this change? @siva@nithin
The SEBI circular is out today, and it comes into effect from Jan 1st 2022. We will need clarity on how all of this will work. This will take some time. But if settlement is T+1, then yeah you can pledge your holdings the next trading day after it is purchased.
I really want to read more about stock settlement. I have already read Varsity by Zerodha but I want to dive into more depth. Please recommend some resources.
Moreover I had a doubt that if T+1 settlement comes into action, will the 20% delivery margin go away ?
I also wanted to connect with you on LinkedIn please see if that is possible too.
In BTST transaction, the shares are first credited to your demat account and then debited. Hence the DP charges are applicable. You can check out this post to know how the BTST settlement process works.
Also this thing will Remove use of DIS SLIPS used by those who has Trading and Dmat Account in different Participants/Brokers.
Also I think that option to choose T+1 settlements between Exchanges is a Nightmare & hence SEBI should Force both either Choose T+1 or T+2 because this will create ruckus for the Exchange who chose T+1.
You can still do BTST like you do now or do you mean BTST in trade-to-trade stocks?
Stocks in T2T segment can only be sold after shares are created to your demat account. So in T+1 settlement, the shares will be credited the next day and you can sell the shares the after.
India will be the second large market after China to implement the T+1 settlement cycle of stocks. Most markets in the world are in the T+2 settlement cycle. What this means is that when you buy stocks, it hits your Demat account after 2 days, and similarly, when you sell stocks you get to withdraw the funds after 2 days. This, 2 days will now become 1 day.
Here is the press release from the exchanges. What it says is that starting Feb 25th, 2022, 100 stocks (starting with the lowest market cap) will move to the T+1 settlement cycle on both exchanges simultaneously. From March 2022, 500 stocks ranked from the bottom will move to T+1 settlement cycle.
BSE being an older exchange has almost 5000 active companies listed and NSE has almost 1800. The ~3000 additional on BSE are lower market cap companies (mostly penny stocks). So what this means is that in around 10 months from Feb, or by Oct 2022, all the stocks in Indian markets will be on the T+1 settlement cycle.
How does an investor benefit?
When you sell stocks, you can withdraw the money in 1 day and not 2 days like before. Not being able to withdraw funds for 2 days, is the most asked question to our customer support. So hopefully this will reduce some support effort for our team.
When you buy stocks, you get it to your Demat in 1 day, in case you want to pledge them for margins.
When you buy and then sell a stock within 2 days (before stock crediting your Demat), there is a short delivery & hence an auction penalty risk. Short delivery is when the person selling the shares fails to deliver the stock to you. If you have sold the stock and don’t have shares in your Demat, you will end up defaulting to deliver the stock as well. In which case you carry the risk of paying an auction penalty. This risk of 2 days reduces to just 1 day. To read more on short delivery and auction penalty, check this.
Why not T+0 or Instant settlement?
This question on why we can’t have an instant settlement in today’s world where UPI is powering almost 4billion bank transfers a month all settled instantly keeps coming up. What you need to understand is that unlike in bank transfers where there is one underlying that moves between two accounts - money, in the stock markets there are two legs. Stocks & money. While stocks are also in digital format and can potentially be moved instantly, it can’t really be moved instantly because of intraday trading.
The majority of trading volumes on the stock market is from intraday traders who are buying and selling stocks without taking or giving delivery of the stock. So if you did buy shares of a company from an intraday trader on the exchange, he might not have any shares to instantly transfer to your Demat account. Typically this intraday trader will exit his position before the end of the day and that obligation to deliver the stock will eventually land with someone who holds the stock. At the end of the day all such buy & sell obligations are crystallized, brokers transfer the stocks and money to the clearing corporation that settle the transaction. While instant settlement is impossible, even T+0 is extremely tough considering the time required for brokers to crystallize the obligations and then clearing corporations to settle.
As per the attached list of stocks and their phasewise schedule for transition to T+1 , we’ll get the last set of stocks to move on 27th January 2023. The last ones to move to this arrangement is going to be all largecap stocks.
We will need clarity on how all of this will work. This will take some time. But if settlement is T+1, then yeah you can pledge your holdings the next trading day after it is purchased.