'You might be wondering...': Here's what Zerodha's Nithin Kamath said as T+1 settlement cycle kicks in from Friday

As the T+1 settlement cycle kicks in India on February 27, Nithin Kamath, the co-founder of low-cost brokerage platform Zerodha, has shared his two cents on the updated settlement cycle.

“Starting tomorrow, India will become the first major market to completely move to a T+1 settlement cycle (China is partly T+1). It is crazy how far ahead we are in terms of market infrastructure and safety, even when compared to the developed world,” Kamath said in his LinkedIn post.

“So if you buy a stock, you get it in your demat the next day, and If you sell, you will have the funds by the next day. This used to take T+2 days. The transition to T+1 has been happening in batches based on market cap (small to big) since Feb 2022,” he added.

It will be a trailblazing moment for the country. The T+1 settlement cycle, also known as the trade date plus the one-day settlement cycle, refers to the process by which securities transactions are settled on the business day following the trade date.

The cycle is designed to provide a balance between the need for timely and efficient settlement of securities transactions, and the need to manage risk in the securities markets. The trade date is the date on which the buyer and seller agree to the terms of the transaction, and the settlement date is the date on which the securities are delivered and payment is made.

Talking about the reasons on why instant settlement isn't a thing in the stock market, Kamath noted: “You might be wondering, why isn't instant settlement like payments possible. This is because most trading volumes on the exchange are from intraday traders who buy and sell stocks without taking delivery or have the stocks to deliver immediately."

The T+1 settlement cycle refers to the process by which securities transactions are completed one day after the trade date. In other words, if a trade is executed on Monday, it will be settled (i.e. the transfer of cash and securities will be completed) on Tuesday. 

The cycle is important for a number of reasons. One of the most important is that it helps to ensure that securities transactions are settled in a timely and efficient manner. This is important for market participants, as it allows them to manage their positions and liquidity more effectively. 

Additionally, the T+1 settlement cycle helps to reduce the risk of counterparty default, as it provides more time for market participants to assess the creditworthiness of their counterparty before settling the transaction.

The T+1 settlement is also important for regulators, as it helps to ensure that securities transactions are settled in a manner that is consistent with the overall stability and integrity of the securities markets. This is accomplished by requiring market participants to manage their positions and liquidity in a way that is consistent with the T+1 settlement cycle, and by providing regulators with more time to monitor and manage any potential risks that may arise from securities transactions.

For most countries around the world, the settlement cycle is T+2 and T+3, or trade date plus two/three days. This allows for additional days for market participants to manage their positions and liquidity, and for regulators to monitor and manage any potential risks that may arise from securities transactions.

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