Market regulator Securities and Exchange Board of India (SEBI) on Tuesday introduced a 'T+1' settlement cycle for the completion of equity transactions. The move gives stock exchanges an option to offer either the new cycle or the existing T+2 one, wherein trades are settled in two working days after the transaction.
But stock brokers have opposed the new system. They are still figuring out how the system will work, and have raised concerns over the new cycle. The T+1 settlement system is likely to create confusion and market participants are still figuring out the process, they said.
A bourse may choose to offer a T+1 settlement cycle on any of the scrips, after giving advance notice of at least one month, according to the circular. The exchange will be required to send the notice to all stakeholders including the public at large, and to also publish it on its website.
Speaking to CNBC-TV18, Rajesh Baheti, Director of stock brokers' association ANMI, said that the new system may affect the interoperability of the bourses if they don’t work in uniformity.
If one exchange decided to go into the T+1 plus one settlement, and the other continues with T+2, the entire interoperability that came into force from 2019 will again become non-interoperable, he said. Baheti further said that Sebi has made it very clear that T1 and T+2 settlements will not be fungible.
“So clearly, I don't understand the logic behind this circular. But if one of the exchanges were to adopt a T+1, then they are no longer interoperable again,” he said.
Sebi has also given an option to stock exchanges to switch back to the current T+2 system once they swtich to T+1, but there's a catch. This will be allowed only after completing a minimum period of six months mandatorily with the new system. Bourses will also be required to give one-month notice to the market in advance to switch back to the T+2 system.
Baheti is of the view that T+1 settlement cycle has to be in entirety or not at all.
“Today, if I'm selling a stock, and buying another stock, that trade is fungible and I don't have to pay any (extra) money. But assuming that I'm buying something in a T+1 settlement, and I'm selling something to pay for that in a T+2 settlement, I will have to put the entire bill of my purchases. Settlements nowhere in the world are half T+1 and half T+2,” Baheti said.
Anmi -- a pan-India body comprising trading members of stock exchanges such as BSE and NSE -- had earlier written in a letter to Sebi: "Shifting to T+1 settlement would make India a pre-funding market and global Institutional Investors will be faced with multiple issues with this structure.”
"If the settlement of T+1 is adapted then the MSCI country classification methodology may look at it negatively as it is likely to result in Indian Market being pre-funded market. This may result in a drop in the weightage to India in its MSCI emerging market Index. This will adversely affect flows into the Indian market," it said.
The securities settlement of foreign portfolio investors (FPIs) is operationally complex and involves coordination among multiple entities, such as fund managers, global and local custodians, brokers, clearing members, and exchanges, located in different countries working on different time zones.
Baheti believes that the current T+2 settlement cycle is ideal from a funding perspective. However, if Sebi convinces every stakeholder for a T+1 cycle, then it has to be done all at once, and not with some scrips going into T+1 or some exchanges going into T+1, as that would confuse everyone.
“In the long run, if the economy does well, funds will come into India. But the problem is that when you consider how you are going to settle your market, you have to look at investors from all the way from Wellington in New Zealand to maybe San Francisco in the US. There is an 18-19 hour time gap between those two markets,” Baheti said.
"So if you are going to be trading sometime in the middle of that cycle, you have got to be able to give every investor the opportunity to be able to complete a settlement successfully," he added.