Foreign investors are against SEBI's fast settlement plan

 Foreign investors are against SEBI's fast settlement plan

Foreign investors are against SEBI's fast settlement plan

Major funds expressed their concern that the proposed shift might divide market volumes and skew pricing owing to two settlement cycles in a letter to the market regulator.

The new agreement will be implemented by SEBI in two stages

Concerns over the Securities and Exchange Board of India's (SEBI) proposal to impose quick transaction settlement in stock markets have been voiced by foreign portfolio investors, or FPIs.

What is the rapid settlement plan of SEBI?

The current T+1 settlement will continue to be accessible to market participants, and fast settlement is suggested to be made optional.

The new agreement will be implemented by SEBI in two stages. In the first phase, traders will collect their winnings by 4:30 pm on the same day, thanks to an optional T+0 settlement introduced by SEBI. In order to assist market institutions in adjusting to the shortened settlement period, this will be a transitional step. After that, the market will switch to instant settlement, in which traders will get their profits right away, trade-to-trade, within an hour of trading. Phase zero settlement, or the interim phase, will conclude when phase two is put into effect. Market participants anticipate that the first phase of this initiative will launch this year, with the second phase likely to follow next year, although SEBI is currently gathering feedback from the market on this.

The Asia Securities Industry and Financial Markets Association (ASIFMA), located in Hong Kong and representing a number of prominent offshore funds, warned SEBI in a letter on January 12 that while the idea behind it is commendable, it may cause market disruptions. There might be a decrease in the amount. two rounds of settlement exist.

In the 20-page letter, which Moneycontrol examined, ASIFMA stated, "While India should be lauded because it was one of the first to move into has accelerated settlement, which we believe to be an international development, we urge caution if India moves too quickly coming from the rest of the major markets whom are competing for foreign investment."

SEBI did not respond to an email that was received.

market dispersion

In addition to the current T+1 settlement period, SEBI had published a discussion paper in December 2023 that suggested quicker transaction settlement.

SEBI's suggestion is exclusive to the world. Because domestic retail investors would be able to get trade profits instantly instead of having to wait a day for a trader to settle stocks and funds under the existing T+1 settlement system, experts predict that this change will increase liquidity for them. are placed in the designated account.

Market participants predict that foreign funds and some AIFs (alternative investment funds) may weather the current T+1 cycle, even if the majority of retail investors and domestic funds will choose fast settlement due to its superior efficiency and liquidity.

According to ASIFMA, this may have an effect on market liquidity and raise trading expenses. The possibility that shares of the same business may trade at two different values during the T+1 and immediate settlement cycles is one of the main worries.

It is evident that market fragmentation increases the risk of liquidity, which is detrimental to all markets. According to ASIFMA, the majority of investors and regulators want a liquid market that includes a variety of investors and market players, among other factors.

Although SEBI recognized these concerns in the consultation document, it believed that arbitrage traders would always take action to maintain market stability. FPIs, however, disagree with this viewpoint.

Additionally, it seems that the suggested split settlement approach would just shift liquidity between the two settlement segments by depending on a portion of the arbitrage community. According to ASIFMA, it is uncommon for a large market to depend on open market arbitration for such a crucial role, particularly when there are other methods that might enable T+0 and T+1 settlements to coexist.

"The advisory paper assumes ready availability of inventory through intermediaries for marketing stock in T+0 segment and for purchase in T+1," it said.

pre-funding transactions

Pre-funding transactions is another significant obstacle for overseas funds. Domestic investors use their bank accounts to pay for the shares they directly purchase. However, before paying for a deal, foreign funds need to exchange their dollars into rupees.

The Indian forex markets are not open 24/7, and by 7:30 p.m., cross-currency trading is closed. With the time zones separating the US, Europe, and Canada by 10–12 hours, this is a major issue for funds based in these regions.

According to the statement, "FPIs will undoubtedly need to pre-fund since immediate settlement will require them to convert their home currency into Indian Rupees (INR) before settlement for India equities transactions occurs. Furthermore, the quantity is unknown."

"While FPIs must pay, pre-funding is not a problem for domestic individuals who invest, who can do it easily on the same day."Because there are many steps involved, including dealing with custodians and foreign currency institutions, refunds must be completed at least a day or two in advance, according to ASIFMA.

Undoubtedly, FPIs had voiced similar concerns when SEBI sought to change the T+2 settlement mechanism to T+1 two years before. FPI did, however, ultimately modify its internal processes to conform to the revised schedule.