Sebi sets up panel to bring in T+1 settlement, address concerns

Mumbai: The Securities and Exchange Board of India ( Sebi) has revived its contentious plan to roll out a faster trade settlement system for domestic listed stocks. The capital markets regulator last week set up a panel comprising officials from exchanges, clearing corporations and depositories to iron out concerns that could impede a smooth shift in the country’s trade settlement mechanism to T+1 — an abbreviation for Trade plus one day —from the existing T+2.

A quicker settlement has the potential to increase trade turnover and liquidity.

The panel will look into the operational issues that had forced the regulator to put the proposal on the back-burner. While domestic brokers are concerned over the continued hitches in the Pay-in process – a system where brokers deliver sold shares to the clearing corporation on their clients’ behalf, foreign investors have opposed the shorter settlement cycle because it would mean blocking funds in their Indian bank accounts in advance.

The Sebi panel will look at how to implement T+1 settlement system by taking all these concerns into account.

At present, trades on Indian stock exchanges are settled within two days after they take place. A shift to the T+1 system would result in settlements happening the next day, a move aimed at making the market more efficient by reducing the time between cutting a deal and its conclusion. Most global markets still follow the T+2 settlement system.

Sebi wants to advance the settlement process by a day to improve liquidity and reduce risks. With some large markets like the US considering shortening the settlement cycle to T+1 by 2023, the Indian market watchdog too has set up the panel.

“Globally, people are talking of accelerated settlements. That is why the proposal is being pursued again. Nothing concrete has been decided,” said a senior official with a market intermediary.

The tightening of margin norms last year requiring investors to deposit an initial amount with the broker or pledge shares of equivalent value before a trade is executed, is understood to have 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.

Brokers said these two moves have made it possible for the regulator to shorten the settlement cycle.

A Sebi spokesman did not respond to ET’s queries.

“All trades are done by depositing the money upfront, while Pay-ins are happening on the same day. In a way, we are following a shorter settlement system operationally,” said the CEO of a large broker.

Some brokers said they are still facing problems with the implementation of the early Pay-in system.

“There are at least three days where trade files from exchanges come in late,” said the CEO of another brokerage. “How can we shift to T+1 if the system is not operating fully well.”

Several foreign institutions, (operating in various time zones) have been the bigger opponents of implementation of the T+1 system. They are reluctant to keep aside large amounts for their trades because of currency risks. Custodian banks, which handle trades and back office of foreign investors, too, have opposed the plan. After a broker executes a foreign investor’s trade, the obligation is on the custodian to ensure that the transaction is completed. Trades cannot be funded by custodians. But, brokers said all overseas funds would not be opposed to the shift to T+1 as a lot would depend on the time zones in which they operate. “If a trader receives cash or stocks for shares sold or bought by say 2:30 pm next day, he would be better placed to take advantage of price movements. But one has to take the feedback of intermediaries, banks handling payments, and custodian banks for local institutions and FPIs,” said a market functionary.