Sebi is likely to postpone the T+1 settlement cycle in favour of a phase-by-phase transition

The Securities and Exchange Board of India (Sebi) is likely to postpone and amend the T+1 settlement cycle mandate.

Following comments from international investors, the settlement cycle may now be phased in and only apply to the bottom 100 companies starting February 25, according to sources.

Foreign portfolio investors (FPIs) are objecting to the circular’s provisions, which were supposed to take effect on January 1, 2022. They cite time zone differences, the risk of trade mismatches, and issues with arranging forex on trade day as reasons that could stymie a smooth transition to the shorter settlement cycle.

Most major markets, including Singapore, Hong Kong, Australia, Japan, and South Korea, settle trades within two days. Taiwan has returned to the T+2 cycle after switching to T+1 settlement.

Moving stocks within important benchmark indices such as the Nifty 50 and the Sensex to the T+1 cycle, according to analysts, might be problematic if liquidity runs out and FPIs stop trading.

According to the new plans of the regulator, the bottom 100 stocks by market capitalization will be added to the shorter settlement cycle first, followed by 500 more stocks from the bottom every month until all equities are moved to the shorter settlement cycle.

This will provide systems and market infrastructure institutions enough time to respond to the new cycle. FPIs will have plenty of time to adjust because they typically trade in the top 200 stocks.

Stock exchanges will be required to continue using the T+1 settlement cycle for a minimum of six months after choosing for it for a scrip, according to the current diktat. Following that, if the exchange wishes to return to the T+2 settlement cycle, it will notify the market one month ahead of time. The minimum notice period will apply to any subsequent switch (from T+1 to T+2 or vice versa).

China is the only market of substantial size and scale where the settlement cycle is shortened (T0/T+1). Under the leadership of then-Sebi Chairman G N Bajpai, the Indian market switched to T+2 in 2003.