T+1 Settlement

1. What Is T+1 Settlement?

T+1 settlement means that when you buy or sell shares, the actual exchange of shares and money happens one business day after the trade (T = trade day, +1 = next day). India moved to mandatory T+1 settlement in phases during 2021-2024.

2. The Settlement Timeline

Time	Buyer	Seller
Trade Day (T)	Order placed, funds blocked	Order placed, shares blocked
T+1 morning	Pay-in: Funds transferred to clearing house	Pay-in: Shares transferred to clearing house
T+1 afternoon	Pay-out: Shares credited to demat	Pay-out: Funds credited to trading account

3. Why T+1 Is Better Than T+2

Before 2021, India used T+2 settlement. The shift to T+1 provides:

• Reduced counterparty risk: Less time for something to go wrong between trade and settlement
• Faster fund availability: Sellers get their money one day sooner
• Lower systemic risk: Less outstanding exposure in the system
• Global competitiveness: Aligns India with best practices

4. The Auction Process

What if a seller fails to deliver shares on T+1?

1. The exchange conducts an auction on T+2 to buy the shares from other sellers
2. The defaulting seller pays the auction penalty (typically the difference between auction price and original price)
3. If the auction fails, the exchange does a close-out — cash settlement at a penal price

As a buyer, you're protected: you either get the shares or get cash compensation. As a seller, defaulting is expensive.

5. Short Delivery and Penalties

If you sell shares you don't have (short delivery):

• Your broker will debit your account for the auction penalty
• Penalty = (Auction close-out price - Original trade price) × Quantity
• If the stock has risen, this penalty can be substantial
• Repeated defaults can lead to trading restrictions

6. MTF and Settlement

Margin Trading Facility (MTF) allows brokers to fund your purchases. Under T+1:

• Brokers must settle with the exchange on T+1 even if you haven't paid
• Brokers charge interest on the funded amount until you pay
• If you don't pay by T+2 or T+3, the broker may sell your shares

7. Common Settlement Mistakes

1. Buying before funds clear: If your bank transfer fails, your broker may square off your position
2. Selling shares not yet credited: If you buy on T and sell on T (BTST), you're selling shares not yet in your demat. If the seller defaults, you can't deliver.
3. Ignoring auction debits: Always check your contract note for auction-related charges