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India Stock Exchanges to Implement T+1 Settlement in Phases

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India’s two stock exchanges have decided to simultaneously introduce T+1 settlement in phases starting February 25, starting with the bottom 100 stocks by daily market capitalization averaged in October. Then, from March, the next lowest 500 stocks will be added on the last Friday of each month, with the final batch of India’s more than 5,200 stocks moving to T+1 settlement by January 27, 2023.

This gives the country’s foreign portfolio investors (FPIs) some additional breathing room to prepare for the shift to the shorter cycle. India’s market regulator, the Securities and Exchange Board of India (SEBI), had initially announced it would permit the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) to introduce T+1 settlement on any stock, on an optional basis, from January 1.

Several foreign investor associations, including the Asia Securities Industry & Financial Markets Association (ASIFMA), had lodged formal requests with SEBI to postpone the implementation of the new system, pointing out that three months was insufficient time to complete the necessary arrangements.

Investors based in the US and Europe, who account for about 60% of the $655 billion of foreign investment in India, face the biggest challenge from the move, given they have to process transactions across a chain of participants spread across various time-zones. The move to T+1 also raises the risk of settlement failures for local brokerages, especially considering India lacks facilities such as temporary financing by custodians or a viable securities borrowing and lending regime. Moreover, because India only allows investments in rupees, the compressed settlement cycle would also likely result in higher currency conversion costs for FPIs.

Foreign investors account for an estimated 20% of India’s market capitalization. The shift to T+1 would mean that many of them are forced to pre-fund their transactions in the country, making the local market less attractive, even though the benchmark S&P BSE Sensex index has returned an annualized 14.7% over the past five years in US dollar terms, outdoing the broader MSCI Asia Pacific Index by more than three percentage points. Fortunately, the decision to delay the move to T+1 and adopt a more gradual approach greatly reduces the risk of a near-term outflow of foreign funds from India by giving FPIs much-needed extra time to amend their operational systems and processes.

Eugenie Shen, ASIFMA

Eugenie Shen, Managing Director and Head of ASIFMA’s Asset Management Group, noted that the news was positive for two main reasons. “First and foremost, the two stock exchanges are acting in concert, avoiding any fragmentation of the market which we had feared. Second, the start date has been pushed back by two months and will apply initially to only 100 stocks that have the lowest average daily market capitalization (i.e., most illiquid). Since 500 stocks based on the next lowest market capitalization will be added to T+1 settlement each month thereafter, most FPIs will not be impacted until October or November 2022 when the stocks that they tend to trade in will move to T+1 settlement. This leaves more time for market participants, from FPIs to their custodians and brokers, and the stock exchanges and regulators to come up with solutions to meet the shortened T+1 settlement cycle without triggering pre-funding by investors that are based in the U.S. and Europe which are 10-15 hours behind India time.”

Akshay Thakurdesai, BNP Paribas

Akshay Thakurdesai, Director, Head of Securities Services, India at BNP Paribas echoed that sentiment, saying “It’s a positive development, especially given that FPIs, brokers, and banks need more time to develop and implement necessary systems, cash flows, and forex management.” He added that the clear guidelines provided in the exchanges’ releases “will ensure a smoother and holistic transition to T+1.”

And Sriram Krishnan, Co-Head, Global Transaction Banking, India at Deutsche Bank, commented: “This is hugely positive as it eliminates all previous uncertainties and, at the same time, provides FPIs with over a year to get ready for the same, given that they largely trade only in the top 500 stocks.”

Sriram Krishnan - Co-Heads, Corporate Banking, India Deutsche Bank  AG|ExecLibrary
Sriram Krishnan, Deutsche Bank

In addition to the ordinary shares of companies, their related preference shares, warrants, right entitlements, partly paid shares, and securities issued under differential voting stock will be transitioned to T+1 settlement on the same schedule. All other securities in the equity segment, including closed-ended mutual fund schemes, debt securities and real estate investment trusts, will move to T+1 settlement along with the final batch of stocks in January 2023.

The relevant BSE release is available here, the NSE release here, and a list of the 5,217 stocks and their T+1 target dates is here.