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Come February 25, India’s stock market will become the fastest in the world in terms of payout of money to clients and trade settlement.
Despite a pushback from foreign portfolio investors (FPIs), the National Stock Exchange (NSE) and the BSE on Monday declared that they will implement the T+1 (trade plus one day) settlement cycle in a phased manner starting with the bottom 100 stocks in terms of market value. Thereafter, 500 stocks will be added based on the same market value criteria from the last Friday of March and so on every following month.
Faster settlement
SEBI had given its go-ahead for T+1 settlement in September but FPIs had sought more time from the regulator. Currently, in the T+2 cycle, it takes 48 hours or more for the shares to be transferred into the client account in case of purchases. This means a seller cannot demand payment for at least two days.
When India’s markets move to the T+1 cycle, they will be the first globally. Members close to the FPI trade body and brokers told BusinessLine that it will not be until at least June that stocks where FPIs trade frequently will come under the T+1 settlement norm, based on the phased transition planned. Also, some 98 per cent of trading is concentrated in the top 1,000 stocks.
“The first three months of T+1 will be easy for the markets as the first set of stocks do not have large trading volumes. Every broker will have to upgrade front- and back-office software. It is a solace that exchanges have come up with an idea to give more time for this. June or July will be when we see real action on T+1,” said KK Maheshwari, President, ANMI (Association of NSE Members).
The NSE has nearly 2,000 stocks on its platform while the BSE has more than 7,000 on its main board. All of these will gradually move to the T+1 settlement cycle.
Breathing time for FPIs
“It is going to be a struggle for FPIs that operate in different time zones. But the phased implementation will give FPIs time to reorganise their systems and processes to adjust to the new cycle. No other judgment can be made now,” said a source close to the Asian Securities Industry and Financial Markets Association (ASIFMA).
Brokers and FPIs have resisted the move since it involves technology and staff-related changes, which could drive up their costs. FPIs were concerned as they would have to ensure overnight money transfers to and fro from overseas destinations. They had argued that would have to coordinate among a number of market players, including custodians, sub-custodians, clearing members, and exchanges globally and in countries in different time zones.
Boon for large funds
But there is also a view that traders will find this move very convenient as it will speed up the money movement. “It could be a boon for several large funds. The only short-term risk is that our current systems will be tested. But, then, it would be better if trade settlement is handled by custodians (institutions, banks) than the current practice of brokers doing it. A shorter payment cycle is always a positive,” said Deven Choksey, Managing Director of KR Choksey Investment Managers.
Discount brokers and new-age tech trading firms have been pushing for a quicker settlement cycle. Tech-driven brokers are now betting that the shorter settlement cycle will bring them more clients. SEBI believes that bringing down the settlement cycle will reduce market risks once all systems are in place.
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