SEBI’s T+1 Option Has Left The Market Divided
The market regulator has given exchanges the option to reduce trading settlement time for any stock to within a day of the transaction.
SEBI allowed exchanges to offer T+1 from January, reducing the rolling settlement cycle after a gap of 18 years. In 2003, the Securities and Exchange Board of India had moved from T+3 to T+2.
BloombergQuint spoke with a cross-section of market participants on what this means for them. Most of them spoke on the condition of anonymity to speak candidly.
Here's what they had to say:
Retail, Domestic Investors
The move is expected to help this segment of investors. A shorter settlement period will allow a faster turnaround of cash and stocks and could eventually boost trading turnover.
It’s also expected to increase speculation as it offers an arbitrage opportunity on a stock with different settlement cycles on exchanges.
Domestic funds will, however, benefit as a shorter cycle means they will get cash faster, allowing them to offer quicker redemption to investors. As of now, retail investors get the redemption amount from equity schemes in a T+3 cycle, or within three days of the transaction.
But T+1 settlement will throw up a challenge in calculating the net asset value as a stock with different settlement cycle on exchanges will have different prices.
The National Stock Exchange of India Ltd., the nation’s largest bourse, had 94% share of market trading in FY21 against 6% of BSE Ltd., Asia’s oldest exchange.
The volumes are so much skewed in favour of the NSE that the two exchanges are unlikely to agree on a same list of stocks with T+1 stocks.
So, while the BSE may introduce T+1 on say Reliance Industries Ltd., the NSE may not. In effect, the stock will have two settlement cycles.
For the BSE, which sees more block deals or bulk deals, a shorter cycle will help offer cash or a stock quicker. And they are likely to prefer to a separate list, according to market participants.
Foreign Portfolio Investors
This category is unlikely to participate in the new settlement cycle as T+1 would require pre-funded trades, something that they don’t do globally because it involves foreign exchange.
Currently, forex is brought in the day after the trade for pay-in by 11:00 a.m. While the forex market is open little 4 p.m. every day, the liquidity is thin after 1:00 p.m., said an executive at a multi-national custodian. That would mean the forex should be available before 1 p.m. on the day of trade.
Effectively, the T+1 system would require bringing in money even before the trade takes place, he said.
That means it would also require transfer of an approximate amount of forex to the custodian, triggering reconciliation issues on the money actually paid and forex transferred, the person said.
Moreover, the global custodian handling the trade will also have to offer T+1 settlement.
Still, as selection is key to FPIs, a must-have stock in the portfolio will generate enough demand to create competition among global custodians to offer such India services, the executive quoted earlier said.
Since cash is locked in for just a day in a T+1 settlement, it will reduce counter-party risk borne by the clearing corporation and the FPIs and reduce the cost of transactions.
Custodians are largely global banks that store securities and cash. According to executives at banks acting as custodians, they have flagged challenges involved to the regulator about seven months ago.
The first concern is forex management. While technologically they will be able to manage the two-settlement cycle in a day, it will put additional pressure on their backend.
Investors from the U.S. and Canada will be able to transfer the amount only after their market opens, when India’s foreign market may not be open or have little liquidity.
Processing time of contract notes would have to be crunched and clearing corporations would have to ensure there is adequate time provided to custodian to complete the process.
While custodians are reluctant to adapt to T+1, it will be demand that will ensure whether they start offering these services to foreign investors, the custodian quoted earlier said. A foreign investor may choose to avoid a stock due to a particular settlement cycle and its compliance only a few times but not for long if the investment is an essential part of the sectoral allocation or portfolio, the person said.
Custodians used to settle trades with two clearing corporations before inter-operability between exchanges and clearing corporations allowed settlement with any of the clearing corporations after June 2019. Different trading settlement cycles on a stock means they will again have to settle the trade at two clearing corporations.
Clearing corporation, which take care of confirmation, settlement and delivery, have informed the regulator they would need four to five months to be ready with two-settlement cycles framework, according to executives BloombergQuint spoke with.
For them too, different settlement cycles will make interoperability redundant for stocks having different settlement cycles on exchanges as netting is not allowed between T+1 and T+2.
Association of National Exchange Members of India, a lobby of brokers, also expressed reservations, citing the possibility of two settlement cycles on the same stocks.
The pay-in and payout cycles are not regular even under the current T+2 cycle, KK Maheshwari, president at ANMI, told BloombergQuint. Settlement files are not received from the exchanges and clearing corporations on time, he said.
The new system will put pressure on the existing infrastructure of the broker, who would go from working finite hours to infinite hours, Maheshwari said.
Maheshwari said brokers are struggling to implement the new mechanism that allows blocking shares at the depository after a sale on exchanges and move them on day of settlement.
It remains to be seen what changes exchanges will make to their systems to let buyers select either of the T+1 and T+2 settlement cycles on the front end and allow brokers to execute it at the backend, he said.
Market infrastructure institutions like exchanges, depositories and clearing corporations are pushing for this settlement, Maheshwari said, and brokers were allowed representation to the whole-time member just a week back on the dificulties they would face in moving to T+1 settlement.