The Hindu Business Line : T+2 cycle: Fine-tune mechanism, say brokers

THE shift from a T+3 system to T+2 could cast a damper on cash market volumes unless trading and settlement mechanism are made much more efficient, feel market participants. With the April 1 deadline fast approaching, many brokers are of the view that it could bring about a decline in delivery-based business, resulting in erosion of volumes, especially in smaller towns.

"The shift to T+2 pre-supposes that settlement functions work like clockwork; whereas, it is seldom the case. There are several infrastructure bottlenecks, particularly with regard to banking, against which brokers have no control. In the initial months, we are bound to see a lot of mismatch in stock and funds transfer with obvious penal consequences," Mr Maulik Sharedalal said.

Voicing his concern over the efficiency of the banking system, Mr Motilal Oswal of Motilal Oswal Securities, said that lack of an efficient banking system, especially in towns, could put pressure on brokers. "Electronic fund transfer (EFT) is practised only by select banks. What about those areas where the banking system is not as efficient? If payments are not made in time, it would put pressure on our working capital," he said.

Commenting on the scenario, Mr. C.J. George, Managing Director, Geojit Securities, said, "Under the current T+3 system, cash delivery has to be made at NSE, Mumbai by Wednesday morning 11.30 am for a transaction which was executed on Monday. This is really cutting it fine in places where there are no banks with instant computerised money transfer facilities." According to him, of the 33 centres (with 94 NSE terminals) in Kerala, just seven to eight locations have computerised instant money transfer facilities.

Currently, conclusion of a transaction on Monday would see the local banks transfer the money to places like Kochi, that have anywhere banking facilities, by Tuesday. These banks in turn ensure that the money reaches Mumbai by Wednesday morning. However, he said that it might not be possible to reduce the time further in places where the support system in terms of banking technology and infrastructure are not in place.

There is also an unvoiced concern that the new system could see an increase in pay-in problems. A fallout of which may be that to bridge this temporary shortage of funds, brokers might even resort to diversion of funds. Or else ask for higher deposits to offset risks which could act as a dampener to trading itself.

A section of the market is also concerned about the role of the depository vis-à-vis movement of shares. "The movement of shares has to be much faster. If a trading cycle is for 48 hours, how can a depository insist on 24 hours prior intimation. And why is it that the market is given a deadline when the market regulators - RBI, SEBI— have not adhered to it themselves," questions market analyst Mr Arun Kejriwal.

Doubts over the clearance of high value trades have also raised its head, especially where FII trades are concerned. "FII trades need time for confirmation. Under the T+3 system, you get one day for the foreign client and custodian to confirm trades. Under the new system, it would be a relatively smaller window, what with the one-day buffer no longer there" a leading broker said.

However, according to Mr S.A. Narain, Executive Director, Kotak Securities, at every transition in the capital market, there has been some amount of problems. "One cannot have 100 per cent of everything. There will be initial teething pains. We saw them when we shifted from a weekly trading cycle and we will see it again. It is now up to both SEBI and RBI to work together and ensure a streamlined market structure," he said.

Mr Sharedalal adds, "Having already achieved T+3, T+2 is not such a great qualitative improvement. There are other systemic and fundamental improvements that we should be concerned about."

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