It is high time, but institutional trades may be the challenge
During the last meeting of SEBI, it once again hinted at moving towards T+1 settlement for stocks. Essentially, it means that trades executed would be settled on the next trading day, against the T+2 formulas being followed now. The idea is welcome, but it will really need buy-in from foreign investors.
Why it is time for T+1
For a long time, Indian stock markets were used to the rather laid-back and lethargic weekly settlement. The crisis in 2001 changed all that. India shifted to T+3 rolling settlements, introduced F&O and banned Badla and ALBM for good. Within a year, markets shifted to T+2 but there has been no progress in the last 17 years, despite mega strides in the quality and digitization of banking. SEBI is of the view that it is now time to shift to the T+1 system.
To be fair, Indian banking is well and truly geared up to handle T+1. It needs to be remembered that even as equity settlements are in T+2, futures and options are already operating in T+1 settlement for a long time and things have been quite smooth. It would be naïve to believe that Indian banks are not geared up to handle T+1. Also, the SEBI view is that small investors are losing billions of rupees each year in the form of free float money as there is a 3 days gap between payment of fund and available credit in demat account. This can crunched under the new system.
Retail investors be pleased
Small investors really do not have any reason to complain. It almost makes intraday, BTST and T+1 settlement seamless. More importantly, it ensures better churn of capital for investors. That means; the same capital gets deployed more effectively in the stock markets and could eventually result in higher volumes in the market and better ROI for investors. Also, the risk in the entire system comes down drastically when the settlement time is crunched by one day. Retail investors stand to benefit and the pressure on exchanges and brokers would not significant.
Foreign investors hold the key
When the T+1 announcement were made by SEBI, the association of FPIs based out of Hong Kong was the first to cry foul. They have a reason. Most of the FPIs operate out of different time zones spread across the US, UK, Middle East and South East Asia. Institutional trades entail custodial confirmation so there is an additional level in the flow. But the real handicap could arise on the forex hedging front. Most of the FPIs hedge their net exposure in dollar terms with futures in the NDF market. This could get complicated in the case of T+1 settlement as a typical FPI trade takes more than a day to complete its full procedural cycle. Unless there is FPI buy-in, it would be tough to implement T+1 in the Indian markets!
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