Stock brokers' association Anmi has said the T+1 settlement system should not be implemented without addressing many operational and technical challenges. Currently, trades on the Indian stock exchanges are settled in two working days after the transaction is done (T+2). The development comes amid reports that Sebi has constituted an expert panel to look into moving the settlement cycle in the securities market from T+2 to T+1 to enhance market liquidity.
In a letter to Sebi , the Association of National Exchanges Members of India (Anmi), a group of over 900 stockbrokers across the country, has raised concerns on issues related to the implementation of the T+1 settlement system.
It said that the implementation of the new system would increase working capital requirements for brokers and enhance the workload on the banks and depository participants (DPs).
“Presently, the Indian banking system is not geared up to fully clear the cheques in one day. Clients staying in remote villages /district towns even today prefer using cheque facility instead of net banking for transferring funds from their bank accounts. Due to which at broker’s end working capital requirements will increase and it will be the broker that will need to make pay-in and pay-out," the broker association said.
“Banks and DPs associated with capital markets would need additional working hours so that clients can move funds and securities on ‘T’ day or trading day itself. There are lots of clients whose trading account and DP a/c are with different entities. Such clients will suffer hardship in giving instruction by slip for transferring securities pay-in," it said.
The association said the infrastructure available with market infrastructure institutions (MIIs) is not able to efficiently meet timely issuance of pay-in and payout and to send files on time.
Elaborating on the challenges, Anmi said, "Whenever there is more than one settlement there is a delay in pay-in / payout for the second settlement. The delay is at times noticed at depository level and at times at the Clearing Corporation (CC) level".
“The operational difficulties are not MIIs specific, they have industry dependencies viz., back office vendors / front office software vendors, etc," the association says, adding that squeezing timelines from all operational timelines may only result in inefficient and chaotic system.
Besides, the window will be too short for the Securities Lending and Borrowing to practically work and there could spill over, it added.
Anmi also noted that the securities settlement of FPIs is operationally very complex, involving coordination among multiple entities like fund managers, global and local custodian, brokers, clearing members, and exchanges.
A shift to T+1 system could “create unnecessary costs and settlement risks for global investors and failures in trade-matching may result in settlement obligation being borne by the brokers", it said, adding that Taiwan, whic had earlier moved from T+2 settlement cycle to T+1 settlement cycle, had to move back to T+2 settlement cycle after foreign investors faced problems.
"Shifting to T1 settlement would make India a pre-funding market and global Institutional Investors will be faced with multiple issues with this structure," the brokers' association said.
Apart from these, global investors might face tax issues, the broker association said. Tax consultants typically compute tax on T 2 and T 3 days, which may lead to a situation where pay-in is received on T 1, but clients would have to hold on to their funds in Indian rupees for a day or two for pending tax computation.
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Published: 30 Aug 2021, 04:09 PM IST
As an experienced financial analyst with a deep understanding of the intricacies of stock markets and settlement systems, I can provide valuable insights into the concerns raised by the Association of National Exchanges Members of India (Anmi) regarding the proposed shift from a T+2 settlement system to T+1 in the Indian securities market.
Firstly, it's crucial to acknowledge that the settlement cycle plays a pivotal role in the smooth functioning of financial markets. Currently, the T+2 settlement system allows for transactions to be settled within two working days after the trade, providing a balance between efficiency and operational feasibility.
Anmi, representing over 900 stockbrokers across India, has expressed reservations about the potential challenges associated with implementing a T+1 settlement system. Their concerns are multifaceted, covering operational, technical, and logistical aspects.
One significant concern raised by Anmi is the impact on working capital requirements for brokers. The shift to T+1 would necessitate quicker pay-ins and pay-outs, placing an increased burden on brokers who would need to manage their working capital more efficiently to meet the accelerated settlement timelines.
The association also highlights the current limitations within the Indian banking system. It asserts that the banking infrastructure is not presently equipped to clear cheques within a single day, especially in remote areas where clients still prefer traditional banking methods over net banking. This poses a challenge for brokers in managing the increased working capital requirements.
Moreover, Anmi emphasizes the operational challenges faced by market infrastructure institutions (MIIs), citing delays in pay-in and payout processes during multiple settlements. These challenges are not isolated to MIIs but extend to industry dependencies such as back office vendors and front office software vendors.
Anmi's concerns extend to the global context, particularly regarding the complexities involved in the securities settlement of Foreign Portfolio Investors (FPIs). The association suggests that a shift to T+1 could introduce unnecessary costs and settlement risks for global investors, citing the example of Taiwan reverting to a T+2 settlement cycle after facing issues with foreign investors.
Additionally, Anmi points out potential complications related to tax computations for global investors. The shift to T+1 settlement may not align seamlessly with existing tax practices, leading to a situation where pay-ins are received on T+1, but tax computations are based on T+2 or T+3, causing delays and holding periods for funds.
In conclusion, the concerns raised by Anmi underscore the intricate web of operational, technical, and logistical challenges associated with transitioning to a T+1 settlement system in the Indian securities market. Any move in this direction would require careful consideration of these challenges to ensure a smooth and efficient transition that benefits all market participants.
