T+1 transition's final leg litmus test for foreign investors' heavyweights

Industry experts are of the opinion that the success of the T+1 settlement cycle will hinge on institutional traders -both foreign as well as domestic

The transition to a shorter T+1 settlement cycle will enter its final and most crucial leg next week. The remaining 200-odd stocks — representing large-caps and high-volume scrips — will be settled on a next-day basis, beginning January 27.

Experts say although the transition has remained smooth, the final leg will be the real litmus test as these stocks have a bulk of foreign portfolio investor (FPI) investments.

Right from the start, FPIs have been opposing the shift from T+2 to T+1 settlement, citing operational difficulties.

Industry experts believe that the success of the T+1 settlement cycle will hinge on institutional traders — both foreign and domestic. A smooth transition will be a big boost for the Securities and Exchange Board of India (Sebi). It is driving other technological and operational changes in the Rs 280-trillion equities market ecosystem, which include a new payment system that will circumvent stockbrokers.

The T+1 cycle refers to the settlement of securities a day after the transaction. A trade done on Monday will be settled the following day. A shorter settlement cycle is aimed at investor protection, risk reduction, and an increase in operational efficiency.

Currently, all top stocks are settled on a T+2 basis.

In a notice on January 13, the National Stock Exchange (NSE) said all remaining securities as on January 25 in the T+2 settlement cycle and securities in the derivatives will be transitioned to a T+1 rolling settlement, effective January 27.

“It is now on the FPI custodians to be faster in issuing certificates and work on truncated timings. They have been calibrating with the system for this change over the past year. We expect the transition to be smooth,” said a member of the FPI advisory committee.

The new settlement cycle has been brought into operation in a phased manner by Sebi over 2022. In November 2021, Sebi issued a circular for the transition to T+1 rolling, effective January 2022. From March 2022 onwards, the bottom 500 stocks were moved to the T+1 cycle at the end of every month.

“We believe T+1 should sail through smoothly. This will also help reduce margin requirements and thereby reduce the cost of transaction. It will be helpful to investors. Overall, it will reduce the risk for the market,” said Kamlesh Shah, president, Association of National Exchanges Members of India, a broker lobby.

For the transition to be successful, the processing of institutional trades will require same-day affirmations between broker-dealers and institutional clients. For facilitating the same, pre-booking for funds to banks will have to be placed by FPIs, potentially increasing their cost of transaction.

An important decision for a smoother operation has been an extension in the cut-off time for the allocation of trades by an hour, announced by NSE last month. Exchanges have revised the trade confirmation cut-off for custodians from 7.30 pm on trade (T) day to 7.30 am the following day of trade (T+1).

The move is to ease operations as FPIs were at odds concerning the difference in timelines which impacts the cost since it requires pre-booking for foreign exchange and pre-funding during non-market hours.

Executives representing FPIs said they have been working on the process for shorter timelines. Asia Securities Industry & Financial Markets Association, a body of financial institutions, declined to comment on the matter.

The Indian securities market moved to a rolling settlement from December 2001 with the T+5 cycle which was replaced with T+3 in April 2002. A year later it moved to the T+2 cycle and has remained so since then.

Experts say that the monumental move will make India the first major market to implement it. While other overseas securities markets are still on the T+2 cycle, the US regulator Securities and Exchange Commission proposed a shorter cycle in February 2022. The US moved to the T+2 cycle only in 2017.

                                                                     Faster Settlement

• All remaining stocks to transition to T+1 cycle from January 27
• Large-caps with bulk FPI investments will move to the shorter cycle
• FPIs working on systems to process forex bookings within stipulated timings
• Shorter settlement cycle aimed at investor protection, risk reduction, and operational efficiency
• Sebi issued the circular for T+1 transition in November 2021
• Phased transition to the new cycle has remained smooth till now