FPI lobby Asifma flags concerns over Sebi's proposed T+0 settlement cycle

'Two settlement cycles could lead to liquidity fragmentation, deterioration of market quality'

Asia Securities Industry & Financial Markets Association (Asifma) has raised concerns about the Securities and Exchange Board of India (Sebi) proposal to introduce a T+0 settlement cycle.

The industry association of top foreign portfolio investors (FPIs) has stated that this move could give rise to several issues, including the bifurcation of the market, liquidity fragmentation, and deterioration of market quality.

In a discussion paper floated last month, Sebi has proposed a separate same-day settlement cycle that will run parallel to the existing T+1 cycle, where trades are settled the next day.

“We are unaware of any major cash equities market in the world that has a dual settlement cycle, nor many that have as short of a settlement cycle as T+0 and instant settlement. While India should be commended for being one of the first movers in an accelerated settlement, which is a global trend, we urge caution if India moves too fast ahead of the rest of the major markets that are also competing for foreign investments,” Asifma mentioned in its feedback to Sebi’s consultation paper.

India fully transitioned from T+2 to the T+1 settlement cycle only last year, ahead of large markets such as the US. The world’s largest stock market will move to the T+1 cycle in May, after announcing its intention nearly two years ago.

“With less than four months left, global asset managers in the European Union, the UK, and Asia are still trying to grapple with the issues and problems that may arise for them from such a move. Noting that there is increasing interest among global asset and fund managers in investing in the Indian market, we would like to suggest that Sebi wait to see the impact of the US move to T+1 settlement on foreign investment in that country before proceeding to an even shorter settlement cycle,” Asifma has recommended.

Sebi has proposed that the shift to the optional T+0 settlement cycle will take place in two phases. Under the first phase — where FPIs and certain institutional investors may be excluded — trades carried out until 1.30 pm will be settled on the same day by 4.30 pm. In the second phase, the T+0 settlement option will be available for the entire market duration.

“Even if Sebi decides to proceed with phase one optional T+0 settlement before then, we strongly urge Sebi to wait to see its impact on liquidity and consult again with the public before proceeding to phase two optional instant settlement,” the FPI lobby has emphasised.

Most FPIs were opposed to the shift to the T+1 cycle as well. Despite that, Sebi, with the help of market infrastructure institutions, managed to successfully squeeze the timeline.

Asifma has stated that while the shift to T+1 was not without challenges for the FPIs, many could still use the same trading and settlement processes. However, the T+0 (and instant settlement) will require a complete overhaul of the trading and settlement processes of FPIs that trade globally in numerous markets, thinking of moving to a T+1 settlement, and the banks, brokers, and custodians that service them.

In its detailed response, Asifma demonstrated how the dual settlement cycle will lead to higher impact costs and volatility, pricing discrepancies, and increased complexity.