Foreign Portfolio Investors (FPIs) have raised concerns regarding the Securities and Exchange Board of India’s (SEBI) plan to introduce instant trade settlement in the equity markets.
In a letter to the Hong Kong-based Asia Securities Industry and Financial Markets Association (ASIFMA), sent to SEBI, it has cautioned that while the intent behind this is commendable, it may fragment market volumes due to the existence of two settlement cycles.
ASIFMA represents many leading offshore funds.
Sebi’s plan is to implement the new settlement in two phases. In the first phase, Sebi will introduce an optional T+0 settlement which implies traders will receive proceeds by 4:30 PM on the same day. This will be an intermediate step to help market institutions align with the shorter settlement cycle.
Then the market will transition to instant settlement where traders will receive proceeds on a trade to trade basis instantly within an hour of the trade. Once phase two is implemented, the intermediate phase i.e. T+0 settlement will be discontinued.
“While India should be commended for being one of the first movers in accelerated settlement, which we note is a global trend, we urge caution if India moves too fast ahead of the rest of the major markets which are also competing for foreign investments,” ASIFMA said.
The Association argued that this could impact market liquidity and also lead to higher trading costs. One of its key concerns is that shares of the same company may trade at two different prices in the instant and T+1 settlement cycles.
“Market fragmentation clearly gives rise to liquidity risk, which is not good for any market. Most investors, as well as regulators, want to see a liquid market, which, among other things, comes with a diversity of investors and market participants,” it added.
Experts believe that the Sebi’s proposal will boost liquidity for domestic retail investors since they would be able to receive the proceeds of the trade immediately as compared to the current T+1 settlement, under which stocks and funds are deposited in a trader’s account with a day’s lag.
While most of the retail investors and domestic funds will opt for the instant settlement since it offers better efficiency and liquidity, foreign funds and select AIFs may stick to the existing T+1 cycle.
Sebi had acknowledged in the consultation paper that these concerns but has taken a view that there will always be arbitrage traders who will step in to ensure price consistency. However, FPIs are not agreeing with this view.