Overseas investors' concerns remain as shift to T+1 settlement cycle nears

Issues around on trade confirmation day, forex booking, pre-funding yet to be fully settled

Overseas investors, as well as other key stakeholders, such as brokers, custodians, and clearing corporations, are yet to iron out critical issues, even as the shift towards a shorter trade settlement cycle approaches new phases.

Several industry players said foreign portfolio investors (FPIs) are still facing impediments over the trade confirmation timelines, foreign exchange (forex) bookings, and pre-funding requirements. This could potentially act as a roadblock when it comes to moving entirely to the new T+1 settlement cycle from next year.

From February onwards, 500 stocks from the bottom in terms of market value are being moved to the shorter T+1 settlement cycle. The top 200 stocks — where FPIs have deployed bulk of their assets — will be moved to a T+1 settlement cycle from January 2023 onwards. However, there are a bunch of stocks with FPI shareholding that will be moved to T+1 next month.

T refers to trading day. Currently, the settlement is largely done on a T+2 basis.

Industry players say FPIs are banking on carrying out their trade confirmation on T+1 day. Under the timelines issued by Securities and Exchange Board of India (Sebi) and stock exchanges, trade confirmations have to take place at 7.30 pm on the day of trade.

To ensure trade confirmations on the same day, FPIs will have to arrange for funds and forex in advance. This will increase the cost of trading as FPIs prefer arranging for precise funds and forex after getting trade confirmations. Also, they will be compelled to book forex during non-market hours.

Industry sources said FPIs are hopeful that they will be allowed to do their trade confirmation early the next day. However, this will create problems for brokers as the Reserve Bank of India (RBI) wants them to furnish 50 per cent collateral for extending intraday funding.

“FPIs want trade confirmations to take place on T+1 morning. If Sebi agrees, they will be happy. However, brokers will be unhappy as it will increase the cost of doing business for them. After the recent Reserve Bank of India (RBI) order, it can even make it unviable. Banks taking intra-day lines have to furnish 50 per cent collateral,” said a source.

In April, the RBI imposed a penalty of Rs 93 lakh on Axis Bank for non-compliance with ‘loans and advances — statutory and other restrictions’. Following the RBI order, banks have to strictly provide 50 per cent collateral on intraday funding.

If FPI trades are confirmed on T+1 basis, brokers will have to tap intraday funding from banks in an event of a mismatch of trade — known as hand delivery in industry parlance.  Industry players say many brokers may not have adequate balance sheet size to provide large collaterals.

Sources said FPI industry lobby Asia Securities Industry & Financial Markets Association (ASIFMA) is in talks with Sebi and various stakeholders address some of these issues.

Spokesperson for ASIFMA refused to comment on the issue. In a statement last year, ASIFMA had said FPIs will not be impacted in the initial phases and this would give them time to “come up with solutions to meet the shortened T+1 settlement cycle without triggering pre-funding by investors”.

An email sent to Sebi remained unanswered.

Industry players say the T+1 settlement cycle will advance, according to the set timeline. 

“The phased roll-out of T+1 settlement framework gives us an opportunity to set up and try out the process flows around forex bookings and trade confirmation timelines.  Based on initial experience, we can evaluate and share inputs for any changes that could be needed. The industry had requested for a trade confirmation deadline to be kept for T+1 morning (currently 7.30 pm on T day) as FPIs have expressed that it would work best for them,” said Sriram Krishnan, managing director and head securities services, Deutsche Bank India.

India is the first major market to move to a T+1 settlement cycle. The world’s largest market — US — too has floated a discussion paper in this regard.

A recent paper by the Securities Industry and Financial Markets Association has asked for time until 2024 to implement the T+1 settlement cycle in the US. The industry body has raised similar concerns as those in the Indian context in the 45-page paper.