How T+1 is likely to change

For starters, the F&O settlement in India already happens on T+1 basis. Indian banks are substantially fine-tuned to handle the shift to T+1. The problem arises on two fronts. The first pertains to the idea of whether the decision to shift should be voluntary or mandatory. The second pertains to whether the shift should be done on the most liquid stocks or the least liquid stocks. After all, it is the most liquid stocks that see the maximum volumes in the market. 

Regarding the date of shifting to T+1, SEBI is likely to postpone this to end of February or perhaps even a later date. That will give time to test and verify that the back-office processes are tuned up. The second pertains to stock selection. Instead of the most liquid and largest stocks, SEBI may opt to start T+1 with the smallest stocks in the NSE-500 by market cap. This will have two merits. Firstly, it will give enough time to grasp the practical problems in T+1 and even address them. Secondly, FPIs had some reservation about T+1 in frontline stock names due to time zone difference as the exposures have to be hedged. 

Middle path is a good approach

The modified version of T+1 will actually hit many birds with one stone. Firstly, it will give enough time for the investors and the back-office systems to attune to the new settlement system. Secondly, the T+1 system will be started on the smaller stocks so any mistakes along the way can be corrected without paying too much of a price in terms of systemic risk. Thirdly, once the T+1 system is working perfectly for small stocks, it should work for larger stocks also. In the meantime, the FPI custodians clearing the trades, will also have the requisite time to adjust their systems to the new settlement model smoothly. 

What is the global experience

Interestingly, the global experience, at least in Asia has not been enthusiastic about T+1. In major markets like Hong Kong, Singapore, South Korea and even Australia, the settlement continues to be done on T+2. Taiwan had shifted to a T+1 system but had reverted back to the T+2 system for practical reasons. In a way, if India is able to successfully create a T+1 market, it would be a big boost for the markets as the entire cycle of trading, settlement and monetization will get substantially crunched. It has taken India 18 years to move from T+2 to T+1 and this is going to be the tough part. SEBI has done the right thing by finding the middle path. If markets are getting better, none should complain!