T+1 settlement: Sebi unlikely to yield to pressure from foreign funds

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The market regulator may not budge from its plan to introduce the T+1 settlement in 2022, the Economic Times reported on Friday. According to the report, even as offshore funds prepare to lobby the finance ministry against the new rules, the Securities and Exchange Board of India (Sebi) is of the view that the T+1 settlement benefitted domestic investors.

Quoting “people with direct knowledge of the matter”, the daily reported that Sebi felt foreign funds needed only to tweak their systems as they are already following a shorter settlement timeframe in derivatives and they shouldn’t have an issue with its plans to cut the settlement time in equity trades. The market watchdog has recently decided to introduce to T+1 system in select scrips in 2022. The market follows the T+2 system at present.

There have been reports that foreign portfolio investors (FPIs) have raised objections over Sebi’s decision, claiming that the new settlement cycle will essentially force them to ‘prefund’ their trades, i.e., pay for the shares before their delivery. It also increases the trading costs in return, FPIs have said.

Sebi’s rationale

“Domestic investors, including retail investors who account for nearly 95% of cash market volume at BSE, will benefit from a shorter settlement cycle,” the report quoted an official saying. “Let the market be the judge of what is beneficial and what is not. If indeed T+1 settlement is so detrimental to the investors, there will be no volumes in the T+1 scrips. If the market thinks T+1 is more effective, all the investors, including FPIs will adopt the shorter settlement.”

The official is further quoted as saying that all the bids in initial public offerings, wherein FPIs are big participants, are prefunded nine days before the actual allotment.

At present, the settlement is done for T+2 days. Under the proposed settlement system, investors will get shares the next day.

What irks the FPIs

According to the report, FPI continued to raise its objections to the T+1 plan. Trading desks of several FPIs are planning to seek appointments with officials of several ministries, including the finance ministry. The report quoted an unnamed official of a Singapore-based fund as saying, “We were under the belief that the consultations were still in progress but now since SEBI has issued the final circular, we are planning to take up the matter on war footing…We have time and again pointed out to SBI that T+1 settlement is not feasible for FPIs due to a variety of reasons but unfortunately the regulator went ahead with the plan.”