Understand the new T+1 settlement system of BSE and NSE

by Banking Desk

From February 25, National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) have implemented the T+1 settlement rule. For now, this rule will be applicable to selected shares.  Gradually other stocks will be added to this system.

 Earlier, foreign investors had objected to the T+1 rule on the new rules, but despite this, the system has been brought. Till now, there was only a T+2 settlement system in India which was brought by SEBI in 2003. Before that, there was a T+3 system.

While proposing this plan in September last year, SEBI said that it was receiving requests from several stakeholders to reduce the period of the settlement cycle. Subsequently, SEBI had given the option to the exchanges to implement the new cycle. In November last year, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) said in a joint statement that they would implement the new system in a phased manner from February 2022.

What was the existing system?

 From the Settlement system, we understand the official transfer of shares to the buyer’s account and cash transfer of sold shares to the seller’s account. Indian stock exchanges till now followed only T+2. This means that the funds and security credits to your account once the order is executed. Under the T+2 system, if you sell your shares on Monday, the money of these shares will be transferred to your account in 2 business days which means on Wednesday. Similarly, if you had bought shares, then these shares were used to credit in your Demat account in 2 days.

The new T+1 system:

Before the introduction of the T+2 settlement system by the Securities Exchange Board of India (SEBI) in April 2003, India had a T+3 settlement system.  This means that it used to take three days for the shares and money to be credited to the account. Now, with the implementation of the T+1 system, the shares and money will be credited to your account within 24 hours.

Read more: What Is A Contra Fund? Should You Invest In It?

On which stocks this is applicable?

Initially, the 100 shares placed at the bottom in terms of market valuation are included in T+1 system. Eventually, 500 more stocks will be added on the last Friday of every month till each stock is included in the new settlement system. Initially, only those who trade in penny stocks will see this effect as stocks with low valuations will be included in the system first. However, as more stocks get added to it over the next few months, its impact will be visible.

Benefits of T+1 system:

With the introduction of T+1 settlement system, the risk of pay-in/pay-out default will be reduced. There will be an increase in trading volume as the margin on your trading account will be blocked for only one day. This is likely to increase retail participation in the equity market.  SEBI has also made it clear that this system will be applicable in all types of security transactions.  If any of the shares on the exchange are included in T+1, the same will be followed in the block deal as in the regular market deal.

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