A one-day trade settlement cycle (called T+1 in industry parlance) could remain a pipe dream for the domestic markets. The proposal by the Securities and Exchange Board of India (Sebi) has met with stiff opposition from foreign portfolio investors (FPIs)—considered to be the price-setters for the Indian market. Industry body Asia Securities Industry and Financial Markets Association (Asifma) has shot a letter to the market regulator and the finance ministry highlighting operational difficulties to FPIs if the settlement cycle is halved.
Currently, the domestic equity markets follow a T+2 settlement---the transfer cash and securities between the buyer and seller gets completed two days after the trading day.
Sources said in the letter Asifma has highlighted operational challenges such as time zone difference, cumbersome information flow process and foreign exchange related issues. The Hong Kong-based body has also warned that a shortening of the cycle could discourage large investors from taking positions in the domestic market and could also lead to increased instances of settlement failures.
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An email sent to Asifma over the issue remained unanswered.
Industry players said different time zones present the key challenge for FPIs as clients are spread across Europe, America, Hong Kong and Singapore.
“The process of receiving contract notes and order matching often spillovers to the next day of the trade. Also, the information flow between global and onshore custodians for most institutional clients is a cumbersome process. More importantly, shorter cycle could disrupt the process of booking forex and moving of funds.
It could increase the operational cost for FPIs as they would be required to park more funds in their onshore accounts,” said a legal expert.
Experts said if Sebi tries to squeeze the back-end process to a day it could raise the risk of failure in trade settlement cycle.
This could discourage large investors from investing in India, thereby hurting our markets, they add.
FPIs are the largest non-promoter shareholders in Indian companies, holding nearly a fifth of domestic equity.
Sebi had formally floated the idea of T+1 settlement through a discussion paper in 2013. Back then, the proposal had faced opposition from both foreign as well as domestic investors---a large portion of whom relied on cheque payments. However, with most domestic market participants moving to electronic mode of payments, Sebi has once again revived the project of shortening the settlement cycle.
The proposal to achieve a T+1 settlement cycle gathered pace after Sebi tightened the upfront margin requirements. A shorter settlement would provide domestic participants greater flexibility when it comes to providing collaterals and margins. It also help reduce systemic risk as capital would free up faster and reduce the outstanding trades in the system, thereby easing the load on the clearing corporations.
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