Why in news? Stock markets in India concluded its transition to the T+1 settlement regime 

Highlights

• India became the second largest market after China to have made the transition ahead of the U.S., Europe and Japan which adhere to the T+2 settlement cycle.

What is the T+1 settlement cycle about?

• ‘T’ represents , trade executed on a particular day.
• The T+1 settlement cycle means that trade-related settlements must be done within a day, or 24 hours, of the completion of a transaction.

Ex: Under T+1, if a customer bought shares on Wednesday, they would be credited to the customer’s demat account on Thursday. This is different from T+2, where they will be settled on Friday

What are the benefits of T+1?

• In the T+1 format, if an investor sells a share, money will be transferred within a day, and the buyer will get the shares in her demat account also within a day.
• The shorter trade settlement cycle fits well for the Indian equity markets from a liquidity perspective, and it shows growth of digital journey to ensure seamless settlements within 24 hours.
• This will also help investors in reducing the overall capital requirements with the margins getting released on T+1 day, and in getting the funds in the bank account within 24 hours of the sale of shares.
• The shift will boost operational efficiency as the rolling of funds and stocks will be faster,

Could it also make markets safer?

• A shortened settlement cycle reduces the number of outstanding unsettled trades at any point of time, and thus decreases capital blocked in the system
• The narrower the settlement cycle, the narrower the time window for a counterparty insolvency/ bankruptcy to impact the settlement of a trade.
• In the era of increasing trade volumes, a shortened settlement cycle will help in reducing systemic risk

Why did foreign investors oppose?

• Foreign investors were against proposal, as they have issue with time zone differences, information flow processes, and foreign exchange problems.
• It would be difficult to hedge their net India exposure in dollar terms at the end of the day under the T+1 system.
• In 2020, SEBI deferred the plan to halve the trade settlement cycle to one day (T+1) following opposition from foreign investors.