Question

It has been made compulsory to settle all trades within 2 days of the trade, i.e. on a T+2 basis, since 2003. Prior to the reforms, the securities were traded and all positions in the stock market were settled on a .............. settlement cycle whether it was delivery of securities or payment of cash.

• A. Weekly fortnightly
• B. Daily
• C. T+4 days
• D. T+3 days

Hint:

Evolution of Indian Stock Market Settlement:
Traditional pre-reform = Weekly Fortnightly $\rightarrow$ Transition = T+3 $\rightarrow$ 2003 onwards = T+2 $\rightarrow$ Modern = T+1 T+0.

Answer 1

The Correct Option is A

Concept:
Settlement refers to the process of transferring bought securities to the buyer and delivering payment to the seller.
Reforms led by SEBI modernized Indian capital markets by replacing traditional manual paper settlements with automated rolling settlement systems.

Step 1: Historical Review of Indian Settlement Cycles:
Prior to the implementation of capital market reforms, stock exchanges in India operated on a manual, account-period settlement system.
Trades were accumulated over fixed periods and settled on a weekly or fortnightly basis.
This prolonged timeframe increased counterparty default risk and facilitated unchecked market speculation.

Step 2: Modernization to Rolling Settlement:
To enhance market efficiency and investor safety, SEBI replaced fixed-period settlements with rolling settlements.
The settlement cycle was progressively accelerated from T+5 to T+3, and then to T+2 in April 2003 (with select trades now settling on a T+1 and T+0 basis).
The traditional benchmark prior to these reforms was the weekly or fortnightly cycle.

Step 3: Verification of Options:
Option (A) accurately describes the pre-reform settlement cycle.

Step 4: Final Answer:
Therefore, the correct choice is (A).