Sebi may ready a 2-speed track for trade settlement | Economic Times

Mumbai: The Securities and Exchange Board of India (Sebi) may allow a two-speed trade-settlement system, following resistance to its proposal to shorten the cycle. The capital markets regulator might permit an optional T+1 — trade plus one day — settlement process, a move that will allow investors to decide whether they want to conclude the transaction at a faster pace or stick to the existing T+2 system, said four people with direct knowledge of the matter. The plan follows stiff opposition from a section of foreign investors and their custodian banks to T+1, because of worries that the shorter settlement process could increase their costs of trading in India.An optional settlement approach will give investors the flexibility to choose the system they want. One of the proposals being considered by Sebi is providing brokers that opt for the faster settlement process quicker delivery of shares or payments, said three of those cited above.ET had reported on a possible shift to T+1 in August.“Whoever prefers to continue with T+2, they can do so, and whoever would like to have early settlement can opt for T+1,” said one of them. The proposal was discussed at a recent meeting of top officials from Sebi, depositories, exchanges and some brokers.A person who attended the meeting said implementing the optional T+1 settlement will require substantial changes in systems at clearing corporations, depositories, brokers, custodian banks and investors.An optional T+1 settlement will allow foreign funds that are against the shorter trade cycle to follow the existing T+2 process in which share transactions are settled two working days after the buy or sell order is placed with the broker. Most global markets follow the T+2 settlement process. India switched to T+2 from T+3 in 2003.Sebi wants to advance the settlement process by a day to improve liquidity, boost efficiency and reduce risks.Foreign investors have opposed the shorter settlement cycle because it would mean blocking funds in their Indian bank accounts in advance. Since their trades are huge and cannot be funded by custodian banks, keeping aside large amounts involves currency risks. For the custodian banks, which handle funds and trades of foreign funds, it would mean working across time zones as per client requirements. After a broker executes the foreign investor’s trade, the obligation is on the custodian to ensure that the transaction is completed.The recent tightening of initial margin norms, which require investors to deposit an initial amount with the broker or pledge shares of equivalent value before a trade is executed, prompted Sebi to consider moving to the T+1 cycle. Simultaneously, most brokers have begun the transfer of sold shares of their clients to clearing corporations on the same day of the trade following Sebi’s nudge. High net worth individuals, who used to transfer shares from their demat accounts through the Delivery Instruction Slip (DIS) sanction note until the lockdown started, are using the depositories’ quicker online share transfer systems.Sebi expects domestic investors are on board for a smooth transition to the T+1 system.“A lot of retail investors are now using early pay-in to get the margin benefit. So, they will prefer T+1. Eighty percent of sales transactions are early pay-in,” said the one of the people quoted above. Pay-in is the process of brokers delivering sold shares of clients to the clearing corporation.“With the introduction of compulsory collection of margins in the cash segment, almost all securities’ pay-in with the exception of BTST (buy today sell tomorrow) cases are being completed on T (the same day),” said Uttam Bagri, chairman, Bombay Stock Exchange Brokers Forum. “Any simple option to the clients completing the funds pay-in earlier to the clearing corporation is most welcome.”A section of foreign investors is receptive to the faster settlement system, said one of the people quoted above, having interacted with them.“Different FPIs (foreign portfolio investors) will take different views. We can’t say that all the FPIs will prefer T+2. We see that a large number of FPIs are making early pay-in,” the person said. “It will depend on where they are located and the time zone.”