FPIs may get funds on day of settlement from October, says Sebi WTM

Rs 1 trillion float lying with custodians may reduce with faster remittance

The Securities and Exchange Board of India (Sebi) is working on measures to ensure Foreign Portfolio Investors (FPIs) can take out funds on the day of settlement — making access for them on a par with other investors in the market.

Speaking at the Global Fintech Fest, Sebi whole-time member (WTM) Ananth Narayan said the market regulator is nudging custodians to ensure that FPIs get access to their funds on T+1 (Trade plus one day or a day after trade execution) instead of T+2.

The proposed move will help faster remittance of nearly Rs 1 trillion float lying with custodians. Float refers to client fund lying with the intermediaries, on which sometimes the entities can earn interest.

 

“From October 2024, we expect custodians to make available funds to FPIs on the day of the settlement itself,” said Narayan.

While the Indian market moved completely to T+1 settlement cycle from January this year, most FPIs still can access their funds from the sale of securities only on T+2 or later. Simultaneously, India is also testing same-day settlement after its beta version launch in March. However, the response to the same has been tepid.

At present, custodians provide details of the transactions to tax consultants only after the settlement, which is done on T+1. It is followed by tax computation details by consultants on the evening of T+1. Thus, the funds are made available to FPIs only on T+2, or later.

“Custodians will provide details of FPI transactions based on inputs from the Clearing Corporations on T+0 evening itself, so that tax-related formalities can be completed early on T+1, well in time for the funds to be remitted the same day,” said Narayan.

Sources said that the regulator has been in dialogue with the big four tax consulting firms on this and is also consulting with the custodians. However, the changes may increase some costs in the process. Sources added that NSDL (National Securities Dipository Limited) may be made responsible to do the tax computations.

The Sebi WTM also indicated that T+0 settlement cycle, which is currently optional and is being tested in its beta version, may remain optional for a longer period, thus pushing the timeline for instantaneous settlement even further.

Narayan also called for competitive fee by stock brokers in the market to remove client float lying with them and thus bring transparency.

He disclosed that stock brokers hold around Rs 2 trillion of client funds on their books, on which they earn around Rs 12,000 crore as interest annually. The float with brokers is facilitated due to pre-funding for small value purchases and a settlement on T+1 basis.

“Brokers are not scheduled commercial banks, and do not have the full set of capital and other regulatory safeguards that banks have. From a transparency, efficiency, and risk perspective, we would all be better off if the implicit broking revenues from having client float balances were to eventually be replaced fully by explicit and transparent fees set in a competitive market,” said Narayan.

The market regulator has taken several measures in the last year that will reduce the client float lying with the brokers. Sebi has also proposed UPI block mechanism, an ASBA-like framework, for the secondary market to be mandated for qualified stock brokers.

The mechanism ensures that the fund is deducted from the client’s account only when the trade is executed and thus reduces the risk of funds lying with the broker.