Local and global custodian financial institutions have reportedly appealed to capital markets regulator SEBI to defer the implementation of the T+1 settlement cycle option till April 2022.
Custodian banks are financial institutions or banks that safeguard the securities and funds of investors. They are SEBI-registered institutions that also arrange settlement of sales or buys and deliveries of such securities and currency, be it outgoing or incoming.
What is the T+1 cycle all about?
According to SEBI’s current plan, the T+1 settlement cycle option will be implemented from January 1, 2022. As per this settlement cycle, trades are settled in trade day plus one day or T+1. The current cycle that is being followed is the T+2 settlement cycle, wherein a buyer of stocks gets the transfer of said shares in their Demat account in trade day +2 days. Similarly, any sale of shares will get funds in their Demat account within the trading day plus two days. Till 2003, India’s stock market followed the T+3 settlement cycle. The term settlement cycle pertains to the time taken between the date of trade, ie, the day of execution of an order and the date that traders get to see the result of their transaction in their Demat accounts.
The SEBI plan to shift to the T+1 settlement cycle is however an option being given to stock exchanges for select scrips. As per SEBI, an exchange may opt to offer the new settlement cycle after giving advance notice of one month to all the stakeholders involved. Also, having opted for the T+1 settlement cycle for a particular stock, the exchange would have to continue with it for at least six months. If it wishes to switch over to the T+2 settlement cycle yet again, it would have to do so by offering notice of one month.
According to a paper by the capital markets regulator, the new cycle would not just shorten settlement time but also ensure liquidity. It also would lower the exposure of unsettled trades to clearing corporations by half, the paper has reportedly noted.
Concerns over the new settlement cycle
However, custodian financial institutions have reportedly voiced some concerns over the new cycle and noted that foreign portfolio investors and concerned stakeholders would need time to iron out operational issues. As per media reports, custodian banks noted that may require more time to implement systems for managing forex and cash flow. It may be noted that FPIs currently convert foreign exchange into the Indian rupee within the T+2 cycle.
As per recent media reports, an FPI team apart from leading banks and brokers have sought the formation of a working group so as to discuss the new settlement cycle. Also, it may be recalled that clearing corporations had sought the extension of the deadline for implementation of the shortened cycle by a few months. These intermediaries, according to news reports, raised concerns that the systems required for the shortened cycle may require more time. They had also noted that most global banks and financial institutions take a maintenance break towards the end of the calendar year for testing purposes and it would reportedly be difficult to put systems in place for the new settlement cycle.
China is currently the only leading market that carries out operations on the T+1 settlement cycle. Most other markets, including the UK, US, Singapore, Hong Kong and Japan, follow the T+2 settlement cycle. Taiwan also reportedly reverted to the T+2 cycle after following the shortened settlement cycle for a brief while.
Close on the heels of clearing corporations seeking an extension of the deadline for the optional implementation of the T+1 settlement cycle, custodian banks, both global and domestic, have sought for the same. Custodians have cited operational issues and have sought the capital markets regulator to defer the introduction of the new settlement cycle to April 2022. The current deadline for the implementation of the T+1 cycle on an optional basis for select stocks is January 1, 2022.
What are custodian banks?
Custodian banks are SEBI-registered financial institutions that handle the securities/assets and funds of investors and safe keep the same.
What is the settlement cycle that India’s stock exchanges follow?
The current settlement cycle that is being followed in India’s stock exchanges is the T+2 settlement cycle.
What is the date of implementation of the T+1 settlement cycle?
SEBI has noted that the optional implementation of the T+1 settlement cycle will be brought in from January 1, 2022.