At present, trades on Indian stock exchanges are settled within two days after they take place — a mechanism described as T+2. Markets like Japan, Hong Kong, Australia, Taiwan, Singapore, South Korea have T+2 settlement cycle.
According to the proposed operational framework, respective exchanges would prepare a list of stocks which would be settled under a faster T+1 mechanism. Thus, a stock can be under T+1 in one exchange but T+2 in another. And, while an investor would have the option to choose the settlement cycle, it would be required to stick to the rule of the exchange. For instance, if the HDFC stock is under T+2 on the National Stock Exchange (NSE) but T+1 on BSE, an investor, preferring T+1 cycle, will have to buy HDFC shares on BSE.
While a shift to T+1 mechanism — cutting the time between a deal and its conclusion — would be preferred by many retail investors and local institutions, it has been opposed by foreign portfolio investors (FPIs) due to time-zone differences and increase in operational cost.
Sebi is yet to take a final decision on the recommendations by the group which comprises officials from exchanges, clearing corporations, and depositories. A Sebi spokesperson did not respond to ET’s email till the time of going to press.
It is understood that Sebi chairman Ajay Tyagi may be keen to bring in the T+1 system before his present term ends in February 2022.
BSE vs NSE?
Even if the proposed switch to T+1 is left to the discretion of exchanges, it would have interesting repercussions and once again fuel the old rivalry between BSE and NSE.
“Suppose if BSE readily agrees to introduce T+1 for a large number of liquid stocks, many retail investors and domestic institutions like mutual funds may move their trades to the older exchange. In such a situation, NSE would be forced to follow even if it’s reluctant to immediately move over to T+1… Liquidity is the lifeblood of any exchange,” said a senior official with a market intermediary.
According to market sources, NSE, which is used by several FPIs, may fear that an increase in cost for FPIs could delay the pruning of weight on China in favour of India by global investment strategists and even by index managers.
FPIs FEAR HIGHER COST
Last year, an FPI lobby told Sebi that “even with a T+2 settlement, foreign asset managers or fund houses are dealing with a tight timeline as they have to get funds converted into rupees and in place by the cut-off time on T+1 for settlement on T+2 since most of them are based outside the Asia region.” Adding that the risk of settlement failure for foreign investors could increase under T+1, it had said that a shortened settlement cycle may also force foreign investors to move towards pre-trade funding and early delivery of securities, which are not only costly for them but also expose them to the risk of information leakage.
According to the FPI association, the settlement model in China with ‘T for securities and T+1 for cash settlement’ is not something for India to emulate given that it remains the biggest complaint among foreign investors that invest in China.
While tighter margin norms in the stock market and a 24/7 payment system in the banking industry would support a T+1 system, the regulator and New Delhi face the challenge of implementing it without unsettling the market.
For decades, changes in the settlement cycle have been a contentious issue in the stock market, dividing powerful lobbies and bourses. The Sebi order on T+2 was issued in 2003 under the then chairman GN Bajpai. While this was a long way from the days of the 1992 stock market scam when exchanges followed a fortnightly settlement, T+2 came at a time when neither investors nor the banking system was geared up for a faster settlement. While it had pushed RBI to work on the Real Time Gross Settlement System (RTGS), it had institutionalised a flawed practice under which brokers took ‘power of attorney’ from investors and traders to meet a stricter deadline under T+2.