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Association Of National Exchanges Members Of India Expresses Concern Over T+1 Settlement Proposal

The Association of National Exchanges Members of India (Anmi), a grouping of over 900 stockbrokers across the country, has raised concerns on issues related to the implementation of the T+1 settlement system.

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Stock brokers' association Anmi has said shifting to the T+1 settlement system would make India a pre-funding market, and global institutional investors will face multiple issues with the structure. Currently, trades on the Indian stock exchanges are settled in two working days after the transaction is done (T+2). 

The development comes amid reports that Sebi has constituted an expert panel to look into moving the settlement cycle in the securities market from T+2 to T+1 to enhance market liquidity. Sebi Chairman Ajay Tyagi, last year, proposed to the stock exchanges to gradually move towards the real-time settlement of trades in the capital market.

In its letter to Sebi on August 28, the Association of National Exchanges Members of India (Anmi), a grouping of over 900 stockbrokers across the country, has raised concerns on issues related to the implementation of the T+1 settlement system. It said that the implementation of the new system would increase working capital requirements for brokers and enhance the workload on the banks and depository participants (DPs).

The association said that number of operational and technical challenges would need to be overcome before implementing the new settlement system as the infrastructure available with market infrastructure institutions (MIIs) is not able to efficiently meet timely issuance of pay-in and payout and to send files on time. Elaborating on the challenges, Anmi said, "Whenever there is more than one settlement there is a delay in pay-in / payout for the second settlement. The delay is at times noticed at depository level and at times at the Clearing Corporation (CC) level".

Besides, the window will be too short for the Securities Lending and Borrowing to practically work and there could spill over, it added. "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," the brokers' association said.

According to Anmi, global investors appreciate the economic efficiency of being able to fund settlement obligations for purchase transactions in one market with sales proceeds from another. The current T+2 settlement cycle is ideal from a funding perspective as foreign portfolio investors (FPIs) need to provide funds in the Indian rupee for settlement, amidst the regulatory environment where banks and custodians are not allowed to fund trades on behalf of FPIs even to cover for operational shortfalls.

"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 results in a drop in the weightage to India in its MSCI emerging market Index. This will adversely affect flows into the Indian market," Anmi noted.

The securities settlement of FPIs is operationally very complex, involving coordination among multiple entities like fund managers, global and local custodians, brokers, clearing members, and exchanges. At present, most of the FPIs, apart from having a local custodian, also have a global custodian and only upon confirmation received from a global custodian, the local custodian confirms the trade.

These global custodians are located in various countries, having different time zones, and the broker or local custodian gets only a couple of hours to follow up and get the confirmation. Today also (in the T+2 regime), many a time, when the confirmation is not received from the global custodian in time, the trades result in DVP trades and the brokers face the challenge of arranging funds and also bears the burden of additional costs associated with it, Anmi said. "Such a shift could create unnecessary costs and settlement risks for global investors and failures in trade-matching may result in settlement obligation being borne by the brokers," it added.

The brokers association cited the example of Taiwan, which had earlier moved from T+2 settlement cycle to T+1 settlement cycle, had to move back to T+2 settlement cycle after foreign investors faced problems. Apart from these, global investors might face tax issues. Tax consultants typically compute tax on T+2 and T+3 days, which may lead to a situation where pay-in is received on T+1, but clients would have to hold on to their funds in Indian rupees for a day or two for pending tax computation.

Anmi said unless these concerns are addressed and operational issues are resolved the T+1 settlement system should not be implemented as the implementation will put the entire broking industry in jeopardy and cause undue hardships.