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Why FPIs, Brokers Worry Over T+1 Settlement ?

Author: Dasari Sreenivasa Rao/Wednesday, November 11, 2020/Categories: Exclusive

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Why FPIs, Brokers Worry Over T+1 Settlement ?

The trading settlement cycle has once again become a hot topic among traders, brokers and institutional investors as the market regulator Sebi has proposed to trim settlement cycle further to T+1 from the existing T+2. The shift to T+1 will take place as soon as the market is adjusted to the new margin system. However, foreign portfolio investors (FPIs) and domestic brokers across India are voicing concerns over the new plan for the stock markets. Association of National Exchanges Members of India (Anmi), the domestic brokers’ lobby, has expressed concern against the T+1 settlement plan, while stating that such move will increase working capital requirement for brokers and enhance the work load on the system. Further, Anmi says, the proposed new cycle will leave less room for contingencies.

Then why Securities and Exchange Board of India (Sebi) is preferring T+1 settlement system? Sebi is of the view that such measure will help boost liquidity, improve efficiency and reduce payment-related risks to brokers and the system. As per the existing system, trades are settled in two working days after the transaction date. India embraced the T+2 settlement cycle from the T+3 cycle in April 2003.

What’s T+1 Settlement?

A one-day trade settlement cycle means trade plus one day (called T+1 in industry parlance). It means that the shares would be transferred to the buyer's demat account the day after the transaction, and the seller would receive the proceeds. When a trader buys or sells a share, bond or any other financial instrument, there would be two important dates -- transaction date and the settlement date. Transaction date, known as the trade date, is the date, on which the security is traded. On the other hand, the settlement date is the date on which the trade is settled. On settlement date, the buyer of the security must pay for the securities delivered to him by the seller. Settlement date is usually one to five days after the trade date, depending on the transaction type. These are referred to as T+1, T+2, T+3, so on. The T+3 means that the settlement date is three business days after the trade took place. This is also known as rollover settlement. Globally, all markets aim to reduce the settlement to T+1 or even same-day settlement. Experts opine that short settlement period reduces the risk of default by the counterparty. Further, It also minimizes the effects of any dealing mistakes, because any errors can be spotted quickly before the stock prices have changed drastically.

Not Prepared For New System

Asia Securities Industry and Financial Markets Association (Asifma), a Hong Kong-based FPI lobby group, had shot a letter to the markets regulator and the finance ministry highlighting operational difficulties for FPIs if the settlement cycle is halved. FPIs are important  contributors to trading volumes on Indian bourses. Foreign investors opine that T+1 proposal discourages them to invest efficiently as they would need to bring in money on the trade day itself which may not be feasible due to different time zones. Asifma in its letter highlighted issues “such as time zone differences, forex challenges and increase in cost of trading. Shortening the cycle could discourage large investors from taking positions in the domestic market.”

Anmi says that the new proposal would also cause inconvenience to domestic participants as well as shorter settlement cycle would leave little room for error. Anmi said: “At present, the Indian banking system is not geared up to fully clear the cheques in one day. Clients staying in remote villages or towns even today prefer using cheque facility instead of net banking for transferring funds from their bank accounts. Needless to say at broker’s end working capital requirements will double. It will be broker that will need to make pay in and payout.” Anmi elaborates: “Members could have connectivity issues due to natural calamities like cyclone, heavy rains disrupting network connectivity issues. As of now members have time to meet this emergency situation but once we move to T+1 settlement cycle there could be hardships when we may not be able to meet the pay-in / pay-out timeline.”

Addl Load on Banks

The shorter settlement cycle will also increase the work load on the banks and depository participants(DPs). Anmi says banks and DPs play a crucial role in the trading ecosystem. “Banks and DPs with the capital markets will need to extend their working hours so that clients can move funds and securities on ‘T’ day itself. There are lots of clients whose trading account and DP a/c with different banks. Such clients will suffer hardship in giving instruction by slip for transferring securities payin,” Anmi said.

Anmi further added that Sebi should address the issues faced by both domestic participants as well as FPIs before implementing the new T+1 settlement system, while suggesting the market regulator to set up a joint committee to deliberate on various issues.

Foreign Investors Pouring In Funds/ 47,000 in sight before Diwali

FIIs remained net buyers in the domestic market as they purchased shares worth Rs 4,548.39 crore on Tuesday (Nov 10). In the past three sessions, net FII inflows stood at Rs 14,786.57 crore. FIIs have been the biggest push for the recent bull-run in the Indian markets and it’s expected that the BSE Sensex may scale 47,000 points in Diwali festive season. Post the significant outflow in September, foreign funds made a comeback in October and the flow has strengthened further in November. FII inflows in October stood at $2.5 billion. However, at a time when FIIs have been net buyers, domestic institutional investments (DII) have remained net sellers. In October, DII outflow stood at $2.4 billion, highest monthly outflows since March 2016. So far in November, net DII outflow stands at Rs 9,826.17 crore, while net FII inflow stands at Rs 17,947.80 crore. Will the current rally continue to take the BSE Sensex to 47,000 level this Diwali? Key indices extended the winning streak for the seventh consecutive session. The market bellwether BSE Sensex surged 680.22 points or 1.60 per cent higher at 43,277.65 points to scale another lifetime high on Tuesday, tracking a global market rally driven by Pfizer's Covid-19 vaccine trials data. The BSE Sensex touched lifetime peak of 43,316.44 during the day, The broader NSE Nifty too touched a fresh intra-day high of 12,643.90. It ended at 12,631.10, up 170.05 points or 1.36 per cent.

Announcements by BioNTech and Pfizer about successful phase 3 trial of Covid-19 vaccine instilled confidence among investors and possibility of sustained economic recovery led sharp buying in beaten down stocks. Favourable global markets and NDA’s surprising lead in Bihar assembly elections also supported the rally. Reflecting the undercurrent fear in the market, the volatilit index 'India  VIX is moving upwards and hovering at 25 level. Nifty on Tuesday was trading above 12,600 points near to its all-time high, while Nifty futures rose over 150 points and crossed 12,600 mark as private banking and oil stocks are in focus. As many as 74 stocks are in long and 54 scrips in short. Nifty rose 1.28 per cent and Open Interest (OI) build-up swelled by over 10 per cent, while Bank Nifty moved up 4.39 per cent and its OI rose more than 30 per cent.

The NSE Nifty rallied for a sixth consecutive session and ended at record high levels on Monday on the back of positive global cues and renewed FII buying interest. Sectorally, BFSI, auto and technology stocks witnessed brisk activity, while select pharma stocks recorded profit booking. According to data from ICICI Direct.com, FIIs bought Rs4,548 crore while DIIs sold Rs3,036 crore in the cash segment. FIIs bought index futures worth Rs905 crore, while in index options they sold Rs 1,705 crore. In the stock futures segment, they sold Rs755 crore. Nifty futures ended at a premium of six points, while Implied Volatility (IV) fell by two per cent.

The writer is a business journalist with 27 years of experience

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