Foreign portfolio investors (FPIs) have raised concerns that the move to T+0, or same-day settlement may fragment the market liquidity or trading volumes, while seeking more time to suggest viable alternatives, given the year-end holiday season, said two sources in the know.
The Securities and Exchange Board of India has proposed a phase-wise transition to instant settlement of trades in the equity cash market and sought feedback by January 12.
The first phase will see T+0 settlement for top 500 listed shares in three tranches from the lowest to highest market capitalisation. Trades till 1:30 p.m will be settled on the same day by 4:30 p.m, according to the consultation paper released last month.
T+0 settlement will be optional for retail investors but will not be applicable for institutional investors. This means that the same security may trade in two different segments: T+0 and T+1. So, when retail investors want to sell the securities, there may not be institutional buyers available; similarly when FPIs want to sell, there may be a few or no retail buyers available as they would want to settle on T+0.
For T+0 or instant settlement, prefunding of both cash and securities will be needed, according to experts. This is because before the trade is executed, the seller will have to transfer the securities to their trading/clearing members via their depository participant so that the clearing corporation (CC) has access to it. As soon as the trade is done and the counterparty stamp is put, the CC will know who to give it to for settlement.
“Pre-funding of both cash and securities will be an issue for institutions,” said a senior official who deals with FPIs.
Even domestic institutions do not know upfront the quantum of securities they will buy on a given day, the person said. This is because the buy requests typically come in by 2-2.30 pm based on credit of subscription monies.
“This will make it difficult, if not impossible, for institutions to trade on a T+0 or instant basis,” the official said.
According to SEBI, a price band of 100 bps may be applied for T+0 trades to ensure there is not too much divergence from T+1 prices. So, if a security is trading at ₹2,800 on T+1, the price range for T+0 can be ₹2,772 to ₹2,828.
Instant settlement will be applicable to all investors, including institutions, on an optional basis. An API-based interface will be built between depositories and CCs to facilitate real-time intimation of early pay-in, according to the consultation paper.
However, nly limit orders will be allowed, so that the adequacy of prefunding can be validated by the CCs against the limit price. All orders placed on the exchanges will be first sent to CCs for validation of prefunding. In case of buy orders, the CC will check availability of adequate pre-funding to cover the trade value along with other charges.
“Institutional trades, along with cross-currency trades, present a unique set of complexities. Coordinating seamlessly across global financial markets, each operating on its own time zone, will demand a strategic and collaborative approach in synchronizing settlement processes,” said Bhavik Gandhi, Head of Operations, Mirae Asset Capital Market.
“It is unlikely that FPIs will opt for instant settlement early on as the market will become prefunded,” said another official who deals with FPIs.