stock market trading: Sebi unlikely to drop T+1 plan despite FPI

Mumbai: The Securities and Exchange Board of India (Sebi) is unlikely to budge on its plan to introduce T+1 settlement next year as offshore funds prepare to lobby the finance ministry against the new rules, said people with direct knowledge of the matter. The market regulator regards the move as benefiting domestic investors, while foreign funds only need to tweak their systems as they are already following a shorter settlement timeframe in derivatives.

Foreign portfolio investors (FPIs) have been raising red flags over Sebi’s plans to cut the settlement time in equity trades to T+1 — or one day after the trade — from T+2 currently. FPIs say that the new settlement cycle will essentially force them to ‘prefund’ their trades, i.e. pay for the shares even before getting delivery of them. This, FPIs say, will increase trading costs.

A senior Sebi official said this wasn’t new for FPIs as all their current derivative trades in India are prefunded. Also, all the bids in initial public offerings, where FPIs are big participants, are prefunded nine days before the actual allotment.

The official also cited the example of the BSE, where FPIs contribute merely 5% of the total trading volumes, excluding block trades.

“Domestic investors including retail investors who account for nearly 95% of cash market volume at BSE will benefit from a shorter settlement cycle,” the official said. “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 market thinks T+1 is more effective, all the investors including FPIs will adopt the shorter settlement.”

Sebi issued a circular on Tuesday allowing stock exchanges to offer select scrips under shortened T+1 settlement from January 1 next year. Currently, any cash market trade that takes place today gets settled the day after tomorrow — i.e. the investor will receive the shares in his account after two days. Under T+1, investors will get the shares in their demat accounts the next day. The regulator sees this as making Indian markets more efficient.

The finance ministry, BSE and NSE didn’t respond to queries.

FPIs are sticking to their guns and seeking withdrawal of the new rules. The Asia Pacific trading desks of several FPIs, under the umbrella of lobby groups, will be seeking appointments with various central government departments, including the finance ministry.

‘New settlement cycle unfeasible’

“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,” said an official of a Singapore-based fund. “We have time and again pointed out to Sebi that T+1 settlement is not feasible for FPIs due to a variety of reasons but unfortunately the regulator went ahead with the plan.”

Unlike normal investors, who buy and sell through simple transactions with…