Phased T+1 settlement cycle roll-out a win for foreign portfolio investors

Real transition will begin only in Dec '22 for foreign investors

The phased rollout of the T+1 (trading day plus one) settlement cycle announced by stock exchanges has brought a cheer to foreign portfolio investors (FPIs), many of whom had opposed the move towards a shorter cycle.

Domestic bourses took a joint decision to move towards the T+1 cycle in 12 phases, starting with the bottom 100 stocks from February-end to the top 200 stocks by January 2023.

The move is not expected to disturb the apple cart as the stocks included in the first nine phases have little or no FPI holdings. Further, the trading volume and market capitalisation of this group is miniscule compared with the overall market.

In effect, the real transition from a foreign investor’s point of view would only begin in December 2022.

The Asia Securities Industry & Financial Markets Association (Asifma), an industry body of top FPIs, has welcomed the framework announced for the T+1 transition.

“Since 500 stocks based on the next lowest market capitalisation will be added to T+1 settlement each month thereafter, most FPIs will not be impacted until August, September or October 2022, when the stocks that they tend to trade in will move to the T+1 settlement.  This leaves more time for market participants, from FPIs to their custodians and brokers, and the stock exchanges and regulators to come up with solutions to meet the shortened settlement cycle without triggering pre-funding by investors that are based in the US and Europe,” it said.

In September, Sebi said the T+1 cycle can be introduced in the domestic market from January 1, 2022. The regulator, however, put the onus on the stock exchanges to decide whether they want to opt for the shorter settlement cycle. Market players feared that the BSE and NSE would opt for different settlement cycles.

“The two Indian stock exchanges and their clearing corporations and depositories said that they will coordinate on the move to T+1 settlement in a phased manner… the two stock exchanges are acting in concert avoiding any fragmentation of the market, which we had feared,” Asifma said.

An analysis done by Abhilash Pagaria, assistant vice-president, Edelweiss Alternative Research, shows that the first constituents from the top 500 universe will move from T+2 to T+1 settlement cycle only from November 25, 2022.