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Stock Exchanges Shift to T+ 1 Settlement Cycle

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Recently, a new update on the settlement cycle has been introduced on November 8, 2021. The major stock exchanges and other market infrastructure institutions announced the much-required switch to the T+1 (trade plus one day) settlement cycle. The market participants said in a joint statement that they’ve developed a plan for the execution of the T+1 settlement cycle, which will start on February 25, 2022. After this positive change of the T+1 cycle, market trade-related settlements will need to be cleared within a period of 1 day of the actual transactions.

Right now, trades on Indian stock exchanges are resolved in two working days (T+2).

When buying or selling a stock, bond, ETF, or mutual fund, you should be aware of two key dates: the transaction date and the settlement date. The transaction date is represented by the letter 'T.' The initials T+1, T+2, and T+3 refer to the settlement dates of security transactions that take place one day after the transaction date, two days after the transaction date, and three days after the transaction date, respectively. The transaction date is the day on which the actual transaction takes place, as the name implies. Suppose you buy 50 shares of a stock today, then today is the transaction date. This date will always be the date on which you completed the transaction, therefore, it will never change.

As per the joint statement, the settlement cycle is executed in a phased manner and will apply solely to the bottom 100 trading businesses from February 25, 2022. From March 2022 onwards, the next bottom 500 equities will be accessible for introduction to T+1 settlement. Market infrastructure Institutions, or MIIS- stock exchanges, clearing firms, and depositories- made the choice. This comes after the Securities and Exchange Board of India (SEBI) permitted stock exchanges in September to implement a T+1 settlement cycle on any equity securities starting January 1, 2022.

From January 27, 2023, a number of large-cap firms, including HDFC Bank, Axis Bank, ITC, DRL, Titan, TCS, and Bajaj Twins, will be part of the T+1 settlement cycle. Every month, on the last Friday (trading day), equities will be added to the portfolio. If any day falls into a trading holiday, the transaction will be completed the next trading day. Once the first segment of stocks moves to T+1 settlement in February, the process and other complications will become evident.

New forms that begin trading after October 2021 will be included in the list, with their daily market capitalization computed based on the average trading price after 30 days of trade.

As per the statement, if the stock falls into the category in (context of market cap)of stocks already subject to T+1 settlement, it becomes eligible for T+1 settlement and will be included in the T+1 settlement cycle on the last Friday of the following month. Preference shares, warrants, right entitlements, partly paid shares, and securities with differential voting rights (DVR) will all be converted to T+1 settlement along with the parent company’s stock.

Wrap-Up!

T+1 settlement cycle is going to be very beneficial for the investors. According to the SEBI report, this settlement not only improves settlement time but also improves and frees up the capital needed to securitize that risk. T+1 also minimizes the number of outstanding unsettled trades at any given time and hence, lowering the clearing corporation’s unsettled exposure by 50%. In case you find it difficult to understand the stock market technical concepts. You can clear all your concepts with the help of StockDaddy. StockDaddy is a  platform where you can learn everything about the stock market from experienced mentors.

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