Last week several things happened together, such as President Putin declaring war on Ukraine, the markets across the globe falling, and eroding investor wealth to the tune of crores. But did you miss the kickoff of the much-awaited T+1 Settlement rule on 25th February 2022?
If you have missed it, don’t worry. We have put together the details in this email for you. Here is what that settlement rule means
T+1 Settlement Rule
The new settlement rules refer to the time between the date of trade i.e., the date an order is executed in the market, and the settlement date, i.e., when participants in the trade exchange cash for securities or cash.
The new T+1 settlement rule will roll out in phases. Stock exchanges in India followed the T+2-day settlement rule before 25th February
It meant if you bought shares on Monday, they would reflect in your Demat account on Wednesday. In case of a weekend, the settlement would happen the following Monday.
The stock markets worked on a T+3-day cycle in 2003 before the T+2-days rule. SEBI decided to shorten the settlement cycle to T+2. Now the new T+1 settlement will help to improve market liquidity.
Benefits Of This Rule
Reduce The Risk Of Default:
The T+1 settlement cycle will help reduce the risk of non-payment or non-delivery of shares from the broker by a day; an improvement over the current cycle followed. When things are uncertain, shortening the cycle by even a day counts, especially when large transactions are involved. Speeding up the settlement process will undoubtedly reduce the risk of default in the stock market.Improve Liquidity: A shorter settlement cycle will provide liquidity as the money for the shares sold and credited will be a day earlier. Investors can then use their cash to buy shares or trade for another day to improve their profits. An early settlement in a volatile market can help investors use their capital efficiently to accrue more profit.
A shorter settlement cycle will provide liquidity as the money for the shares sold and credited will be a day earlier. Investors can then use their cash to buy shares or trade for another day to improve their profits. An early settlement in a volatile market can help investors use their capital efficiently to accrue more profit.
Additional liquidity means the chances of investors undertaking more transactions in the stock market are high. More transactions will benefit the investors and the brokers as they will earn more from high turnover. Remember, increased turnover means the stock exchanges, depositories, depository participants, and even the government will benefit from more fees and taxes.
How Will The Rule Work?
SEBI will rank all stocks in descending order based on an average daily market capitalization for October 2021 across exchanges. If a stock is on multiple exchanges, then the market capitalization will be based on the stock price at the stock exchange with the highest trading volume during October 2021.
The T+1 rule will be rolled out in phases starting with the bottom 100 stocks based on market value from 25th February 2022. Next, SEBI will add 500 stocks to the list on the last Friday of March and every following month. The criteria to pick the stocks will be the same as the first 100.
Investors who transact in stocks that fall under the T+1 settlement will get their money or shares delivered to their Demat accounts in less than 24 hours.
We hope we’ve managed to give you a better idea of the new settlement cycle.
In the meantime, subscribe to 5 in 5 Wealth Creation Strategy to begin your wealth creation journey.