FPIs remain upset even as Sebi relaxes trade confirmation deadline

The Securities and Exchange Board of India (Sebi) has relaxed the trade confirmation deadline to ensure smooth transition to the new T+1 settlement regime. However, foreign portfolio investors (FPIs) are still unhappy and seeking greater leeway, observe industry players.

Earlier this week, the National Stock Exchange (NSE) notified that the trade confirmation cut-off for custodians has been revised from 7.30 pm on trade (T) day to 7.30 am the following day of trade (T+1).

FPIs, however, want the cut-off to be pushed to at least 9.30 pm, so that they don’t have to face the hassle of booking foreign exchange (forex) and arranging for funds.

“After much hand-wringing, Sebi has come out with a solution that treads the middle ground. If the cut-off is delayed further, it will weigh down exchanges and clearing corporations. However, FPIs want a few extra hours. It remains to be seen if Sebi provides further relaxation,” said a person in the know.

FPIs had voiced concerns as regards the earlier cut-off which was on the same day of trade. It would increase their cost of trading, they said, since it would require them to do advance forex bookings and pre-funding.

One of their key concerns with the earlier cut-off was having to book forex during non-market hours. The currency market opens at 9 pm, whereas the cut-off has been set at 7.30 am.

A source privy to the stock exchange and Sebi said the transition to the new system would be observed and only then a decision on further relaxation would be arrived at.

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 a bulk of their assets — will be moved to the 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, starting September and October, when the real impact will be known.

India is the first major market to move to a T+1 settlement cycle. The world’s largest market — US —has floated a discussion paper on this. The Securities Industry and Financial Markets Association has asked for time until 2024 to implement the T+1 settlement cycle in the US.

Since the new system has tried to squeeze the timelines, there are concerns around ‘bad delivery’ and settlement default. To avoid such instances, exchanges have directed brokers and custodians to prepare the so-called obligation reports twice — once on the day of trade and another the next day by 9 am. This is to ensure correct reconciliation of trades.

“There shall be no change in the reports downloaded to members on T and T+1 day, wherein there are no obligation transfer request (OTR) trades. Hence, members who do not have any OTR trades may consider the reports downloaded on T day towards final obligations,” states the circular issued by NSE.

What it means

• FPIs had voiced their concerns on the earlier cutoff which was on the same day as the trade
• Sebi will observe the transition and then decide on whether a further relaxation is needed
• India is the first major market to move to a T+1 settlement cycle
• In the new system, with squeezed ‘bad delivery’ and settlement default are problem areas
• The top 200 stocks will be moved to T+1 settlement cycle, come January 2023