Tips to save IPO listing gains tax!
In the years 2023 and 2024, many IPOs brought huge earnings for the investors. But tax also has to be paid on this! What is the tax rule on booking listing gains from IPO? How can tax liability on listing gains be reduced? How will the tax be calculated on selling IPO shares?
Market regulator Securities and Exchange Board of India recently introduced T+1 settlement cycle for completion of share transactions on optional basis in a move to enhance market liquidity. At present, trades on the Indian stock exchanges are settled in two working days after the transaction is done (T+2). T+1 means that market trade-related settlements will need to be cleared within one day of the actual transactions taking place. Currently, trades on the Indian stock exchanges are settled in two working days after the transaction is done (T+2). The regulator has decided to provide flexibility to stock exchanges to offer either T+1 or T+2 settlement cycle for completion of share transactions.
In an interaction with Money9, Amit Pamnani, chief investment office and DGM– investment banking, Swastika Investmart explained how the move will impact the domestic equity markets. Edited excerpts.
How it is different from the current settlement cycle?
As a stock market investor, if a person buys shares of any company in BSE or NSE today, he will get a transfer of shares in his DMAT account in trade + 2 days (T+2). Thereafter he can sell his shares or hold them. On the other side, the investor selling the shares will get funds transferred in his account within T+48 hours. Now, this settlement is proposed to be T+1 day. Earlier till the year 2003 settlement cycle was T+3 days.
The settlement cycle in stock markets refers to the time between the trade date, when an order is executed in the market, and the settlement date, when participants exchange cash for securities or shares. This system is proposed to be applicable from January 2022.
The Sebi circulate states that if the stock exchange wants to opt for the T+2 settlement cycle in between, it will have to give notice one month in advance.
What is the intention of Sebi behind bringing this new arrangement of settlement?
On the request of market participants, Sebi has come up with this proposal to change the trade settlement cycle to T+1 which means shares will now be transferred in T+24 hours. The market regulator has taken this move in consultation with market infrastructure institutions such as stock exchanges, clearing corporations and depositors. Few market players have expressed their concerns on operation problems in this arrangement of T+1 settlement. The intention behind reducing the settlement cycle will create greater efficiencies in the market and further protect investors’ interest. Accelerating the settlement cycle will help reduce operational risk, liquidity needs, counterparty risk which would also reduce margin requirements and collateral requirements for broker-dealers.
What is means for different types of investors?
This move will be much beneficial to large volume investors like corporates, FIIs, DIIs, who invest large amounts. One day earlier settlement can give them more liquidity and reduce margin requirements. While for the small or retail investors it shall not impact much in T+1 day settlement.
However, it is worth stating here that retail individual investors contribute 45% of daily trading volumes on exchanges and balance 55% comprises of corporates, FIIs, DIIs, proprietary traders and others.
What are the advantages and disadvantages for common investors of the T+1 settlement cycle?
It will provide investors with earlier receipt of their funds post trade execution and settlement. Further, many operational and market risks can be mitigated.
While it may not be disadvantageous to any class of investors except for complying the settlement process on same day. Due to which settlement slips can occur as same-day payments need to be executed by investors and margin money or working capital funds to be arranged by foreign and domestic institutional investors, brokers, sub-broker, corporate investors in a day.
Moving to a T+1 settlement cycle is a complex undertaking and will require significant planning, execution, and testing and it would fundamentally change the market structure.
We believe if infrastructure is upgraded with robust technology and settlement process to be made fast and seamless the probabilities of technical glitches can be mitigated.
Will the new cycle of settlement make any difference to the volatility in the market?
Volatility in the market will definitely increase and investors have to closely keep an eye on their new bets. However, returns come from volatile and high volume markets only so this may be considered positively.
Most of the stock exchanges in developed countries like the USA, UK & Japan currently follow the T+2 trade settlement cycle.
Overall, there will be integral complexities in this arrangement, reducing the settlement cycle will generate greater operational efficiencies, substantially lower capital requirements and reduce risk in the financial system. Therefore, SEBI has given the option to exchanges to adopt T+1 or T+2 based on their readiness from the year 2022.
We recommend doing the pilot testing for 2 days and if it works well then it can be extended to one week and on its successful testing it can be implemented permanently.