Sebi plans to hasten primary market settlement process

In an effort to hasten the process of settlement in primary market issuances, the Securities and Exchange Board of India (Sebi) is mulling ways to shift to the T+2 (transaction+2 days) system, which is followed by the secondary market for settlement of transactions.

Sebi Chairman C B Bhave had recently said that the regulator was considering ways to reduce the settlement time in public issues. Sources close to the development said that Sebi was making efforts to introduce the T+2 system in primary market issuances like initial public offers (IPOs), rights issues and bonus issues.

At present, allotment of shares or refunds in the primary market has to be done within 15 days from the date of the closure of a public or a rights issue. Implementation of a T+2 system would mean that the process of settlement or refund would be completed within two days from the date of investment by a subscriber in any public issue. This would significantly reduce the overall timelines of public issuances and would add to the confidence of the investor. This would also prevent locking-in of investors’ money for as long as 15-20 days, which otherwise could help in improving the liquidity scenario in the secondary market.

“It is technically possible, but the only problem is that in IPOs, a number of subscribers stand as first-time investors, and in such cases a customer-broker relationship is absent,” said Prithvi Haldea, chairman and managing director, PRIME Database.

Market experts said that before such a system was launched, the banks needed to upgrade their inter-connectivity. In the absence of adequate online connectivity among banks’ branches in smaller towns, a T+2 settlement process might not be easy, especially in the case of IPOs, they added.

“The entire application data have to be aggregated on a centralised basis, and the online connectivity within the banking system is required to be improved in order to move to an effective T+2 settlement platform. The marketing and distribution channels in public issues have to be ramped up for having such a system,” added Haldea.

During public issues, a number of investors prefer to make their investments in cheques. The bank compiles these applications, aggregates all payments received, logs the data into its system and forwards the details to the merchant bankers or the company that is floating the public issue. This process takes a longer time in cases of large public issues. In case of such issues, a number of investors belong to smaller towns where the corresponding branches of the banks do not have adequate online connectivity with their other branches or the issuers.

A T+2 settlement system might work for rights issues where shareholders’ money was involved, said market experts, adding, but for IPOs and other public issues, the application process had to be made paperless for enabling T+2 settlements.