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.