Breaking News : The Securities and Exchange Board of India (SEBI) has taken significant steps to enhance the efficiency of securities settlement for Foreign Portfolio Investors (FPIs). Starting in October 2024, custodians, also known as clearing banks, will be required to make funds available to FPIs on the day of settlement itself. This move is part of SEBI’s broader efforts to modernize and streamline financial processes in the Indian market, addressing longstanding inefficiencies that have affected both domestic and foreign investors.
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The Current Settlement Landscape
Over the years, India’s securities settlement procedures have evolved significantly with the adoption of advanced technologies. However, despite these advancements, the payment and settlement processes remain largely paper-based and manual. This reliance on outdated methods has made the system vulnerable to errors, delays, and even fraud. These inefficiencies have been a source of frustration not only for Indian investors but also for FPIs, who are often unable to access their funds promptly after the sale of securities.
Ananth Narayan G., a whole-time member of SEBI, highlighted these issues during the Global Fintech Fest, emphasizing that while technological progress has improved certain aspects of the securities settlement process, the payments and settlements themselves are still lagging behind. He pointed out that the intermediary ecosystem, which includes brokers and custodians, typically benefits from these inefficiencies, often at the expense of the investors.
The Role of Brokers and the Current Settlement Cycle
Brokers play a crucial role in the current settlement process. Narayan revealed that brokers typically hold around ₹2 trillion of client funds on their books on any given day. This is a significant amount, reflecting the vast scale of trading activities in the Indian market. A large portion of these funds comes from small-value purchases, which are generally pre-funded by the investors. Specifically, about 90-95% of transactions involving amounts below ₹1 lakh require investors to pre-fund their accounts with the broker, even though the actual settlement occurs on a T+1 basis.
The term T+1 refers to the settlement cycle where transactions are settled one business day after the trading day. While this might seem efficient, it has its limitations, especially for FPIs. When India fully transitioned to a T+1 settlement cycle in January 2023, it was expected to speed up the settlement process. However, FPIs found themselves facing delays, often accessing their funds from the sale of securities on T+2 or even later, despite the official T+1 timeline.
Challenges in Tax Compliance and Settlement Delays
One of the primary reasons for these delays is the requirement for custodians to ensure all necessary taxes have been withheld before remitting funds to FPIs. This process involves several steps that contribute to the overall delay. After the trade is settled on T+1, custodians must provide the transaction details to a tax consultant. The tax consultant then reviews these details and ensures that all applicable taxes are correctly withheld.
This tax compliance process is often not completed until later in the evening on T+1 or even beyond, which means that the funds are not available to the FPIs until T+2 or later. This delay can be particularly frustrating for FPIs who rely on timely access to their funds for reinvestment or other financial activities.
SEBI’s Intervention and the Path Forward
Recognizing the impact of these delays on FPIs, SEBI decided to intervene. Narayan explained that SEBI gave custodians a nudge to speed up the settlement process, ensuring that funds would be available to FPIs on the day of the settlement itself. To achieve this, custodians will now be required to provide details of FPI transactions to tax consultants based on inputs from clearing corporations on the evening of T+0, the trading day itself.
This change allows tax-related formalities to be completed early on T+1, well before the end of the business day. As a result, custodians will be able to remit the funds to FPIs on the same day, significantly reducing the settlement time and improving the overall efficiency of the process. SEBI’s expectation is that from October 2024, FPIs will have access to their funds on the day of settlement, marking a significant improvement in the settlement process.
The Move Towards T+0 Settlement
SEBI’s efforts to enhance settlement efficiency don’t stop at T+1. In March 2024, SEBI introduced a beta version of an optional T+0 settlement window. The T+0 settlement cycle represents an ambitious goal of instantaneous settlement, where transactions are settled on the same day as the trade. This would be a major leap forward in the speed and efficiency of securities settlements, further aligning India’s financial markets with global standards.
However, while the concept of T+0 settlement is promising, it also presents several challenges. Narayan acknowledged that while SEBI’s Board will ultimately provide guidance on the matter, it might be more prudent to continue with the optional T+0 settlement for now. This cautious approach allows the market to gradually adapt to the new settlement cycle, addressing any potential issues or risks that might arise during the transition.
Implications for the Indian Market and FPIs
The shift towards same-day settlements has significant implications for both the Indian market and FPIs. For the Indian market, these changes represent a move towards greater efficiency and transparency. Faster settlements reduce the risk of fraud and errors, making the market more attractive to both domestic and foreign investors. Moreover, by improving the settlement process, SEBI is helping to build investor confidence, which is crucial for the long-term growth and stability of the market.
For FPIs, the benefits are even more direct. Faster access to funds allows them to reinvest more quickly, enhancing their ability to capitalize on market opportunities. This can be particularly advantageous in a rapidly moving market, where delays in accessing funds can result in missed opportunities. Additionally, the reduction in settlement times aligns India’s market practices more closely with global standards, making it easier for FPIs to operate in the Indian market.
Conclusion
SEBI’s initiatives to enhance the settlement process for FPIs mark a significant step forward in the modernization of India’s financial markets. By requiring custodians to make funds available to FPIs on the day of settlement, SEBI is addressing long-standing inefficiencies that have hampered the market’s growth and attractiveness. The introduction of an optional T+0 settlement window further underscores SEBI’s commitment to innovation and efficiency.
While challenges remain, particularly in the transition to instantaneous settlement, the overall direction is clear: India is moving towards a more efficient, transparent, and globally competitive financial market. For FPIs and other investors, these changes represent a significant improvement in the ease of doing business in India, offering faster access to funds and greater opportunities for investment. As SEBI continues to refine and implement these changes, the Indian market is poised to become an even more attractive destination for global investors.