After FPIs, domestic brokers' lobby voices concern over T+1 settlement

The move will increase working capital requirement for brokers, raise the work load on the system and will leave little room for contingencies.

Close on the heels of the overseas investors group, brokers’ lobby Association of National Exchanges Members of India (Anmi) has raised concerns over the proposal to halve the settlement cycle to so-called T+1.

The move will increase the working capital requirement for brokers, raise the workload on the system, and leave little room for contingencies, Anmi said in a letter to Ajay Tyagi, chairman, Securities and Exchange Board of India (Sebi).

Last month, the Asia Securities Industry and Financial Markets Association (Asifma), a foreign portfolio investor (FPI) lobby group, had shot off a letter to the markets regulator and the finance ministry, highlighting operational difficulties for FPIs if the settlement cycle is halved.

The concerns raised by Anmi threw light on issues that even domestic participants could face.

“Presently, the Indian banking system is not geared up to fully clear the cheques in one day.

"Clients staying in remote villages or towns still prefer using the cheque facility instead of netbanking for transferring funds from their bank accounts.

"Needless to say, working capital requirements at the broker’s end will double. It will be the broker who will need to make payin and payout,” said Anmi.

The brokers’ body had also said a shorter settlement cycle would leave a smaller margin of error.

“Members could have connectivity issues due to natural calamities like a cyclone or heavy rain.

"As of now, members have time to meet this emergency situation.

"Once we move to a T+1 settlement cycle, there could be hardships.

"We may not be able to meet the payin/payout timeline,” stated the letter.

The move will also increase the workload on banks and depository participants (DPs) who play a crucial role in the trading ecosystem.

“Banks and DPs with the capital markets will need to extend their working hours, so that clients can move funds and securities on ‘T’ day itself.

"There are lots of clients whose trading account and DP account are with different banks. Such clients will suffer hardship in giving instructions by slip for transferring securities payin,” said Anmi.

Asifma in its letter had highlighted issues such as time zone differences, foreign exchange challenges, and increase in cost of trading.

The Hong Kong-based body had warned against shortening the cycle, saying it could discourage large investors from taking positions in the domestic market.

In its letter, Anmi had asked Sebi to address the issues faced by both domestic participants and FPIs before implementing the new T+1 settlement system.

“FPIs are critical to the success of Indian markets. Hence, the T+1 proposal discourages FPIs to invest efficiently as they would need to bring in money on trade day itself, which may not be feasible due to different time zones,” said Anmi, requesting the markets regulator to set up a joint committee to deliberate on various issues.

Photograph: Danish Siddiqui/Reuters