What is the concept of Rolling Settlement?

Rolling settlement is a norm under which the settlement of claims in the market is done within 1 day. With effect from April 1, 2003, all obligations in a market shall be settled and netted on a T + 2 system or by the next day. Therefore, in a rolling settlement system, the trades done on Monday are settled by Tuesday.

Why Was the Rolling Settlement Introduced?

There is a need for keeping securities in Demat form because every day is a day of settlement in the rolling settlement system.

  • The rolling settlement system makes the process of settling the dues and claims more dynamic and flexible at the same time. As trades are executed very fast, the investors can keep an eye on the settlements that may change several times in a day in the market.

  • The rolling settlement system was introduced by SEBI w.e.f. 2nd July 2001 where the most active securities were offered a settlement duration of five business days. Other securities were given a term of five days w.e.f. 31st December 2001. The cycle of settlement was brought down to three days and then two days by SEBI later on.

  • Before the introduction of the rolling settlement system, trading was ineffective, the settlements were carried out in the next week. In the general system, the settlement of obligations and paperwork was completed at the end of next week. Trades done on Monday were stretched till the Thursday of the next week to complete the obligations. There were many other issues that stopped the trade from being efficient before the introduction of rolling settlement by SEBI.

Advantages of the Rolling Settlement System

The rolling settlement system of a day is advantageous in many ways.

  • It not only offers a window to view the current status of the market but also makes the settlement system flexible and efficient for investors.

  • As all obligations of the market are fixed by the next day, the investors can stay aware of the conditions and their investment sooner. This may help improve the capital market efficiency to a large extent.

  • Rolling settlements also help investors stay assured about all information of the trade within a given timeframe. As there is no need to worry to wait for a long time, investors can plan new investments and allocate money to other sources for better returns.

  • Rolling settlements also help the small investors by letting them understand the mode of the market quickly. As the results of investment and profitability are available within a day, they can decide to change their ownership to another firm as soon as possible. This helps the small investors to stay away from erosion of the value of their stocks.