The T+1 experiment will only cause untold hardship to smaller intermediaries and investors
Reacting to the Securities and Exchange Board of India’s (SEBI) stated plan to move to a T+1 settlement in a CNBC TV interview, Deena Mehta, a former vice president of the Bombay Stock Exchange (BSE), asked a simple but pertinent question: “Who will it benefit?”
What Ms Mehta probably doesn’t dare to ask is, what is SEBI’s rush to achieve a “global settlement standard” that is not even the norm in most developed markets? The answer is on its website. It says: “Sebi to be the most dynamic and respected regulator — globally”. But this is possible only if SEBI takes market participants along with it, instead of imposing unreasonable demands.
The regulator has already announced that from July this year, stock trading on Indian bourses will begin an hour earlier at 9 am and close at 2.30 pm. This doesn’t mean that brokers can go home earlier. The new trading hours are meant to facilitate the shortened, T+1 settlement (settled one day after the trade); because stock exchanges need extra time to calculate Value at Risk (VaR) margins and brokers need the time to collect payments and delivery instructions from their clients.
Are brokers and investors happy with SEBI’s proposal? Nobody that I know is looking forward to it and for several good reasons. As it is, brokers and investors are struggling to cope with the T+2 (settled two days after trade) system. Faster and more efficient settlements are welcome to the extent that payment and delivery is swift, but there are practical difficulties that they grapple with everyday.
Most broker back offices already work extra shifts to deal with settlement formalities. And the heads of brokerage firms, who are personally accountable for all activity, end up slogging long hours to meet regulatory requirements. Registrar and Transfer Agents and Depository Participants (DPs) are not geared for a faster system and even stock exchanges, under intense pressure to regulate and monitor large trade volumes, are not exactly ecstatic about the idea.
Investors trading in the dematerialised environment face their own set of problems. Many investors sign over blank depository slips to their brokers, for transferring shares out of their depository accounts out of sheer necessity. Although this is akin to signing blank cheques, they have little choice. The automated trading system may link a 1,000 centres across the country to a single trading screen, but the physical distances in cities often make the task of issuing depository instructions complicated.
Today, depository instructions are required to be delivered a day after the trade; in the T+1 system, the time will be further compressed and instruction slips will have to be handed over immediately after the trade. This would force more investors to sign blank depository slips or simply discourage them from trading.
Had SEBI held an open house session to get investors’ views, it would have learnt of these practical difficulties.
The biggest problem with the rush to a T+1 system is that the banking system is not geared to transfer funds swiftly and electronically to all the 1,000 plus centres where the two national stock exchanges have trading terminals. Bourses are often forced to conduct two settlements in a single day because of innumerable bank holidays. If SEBI pushes the T+1 experiment, hoping that the system will rise to meet the demands made on it, it will only cause untold hardship to smaller intermediaries and investors. The move to offer straight through processing, only for institutional investors, also seems a little premature.
What we need right now is for the finance ministry to step in and ask SEBI to hold its horses. SEBI chairman, GN Bajpai, is a man in a hurry, but his goal of having the fastest settlement system in the world and the most comprehensive database of market participants, complete with fingerprints and mug shots is not needed so urgently.
What is far more important is market development; rebuilding investor confidence and bringing them back to the market. The government cannot say that it doesn’t meddle in the regulators’ arena — as a potential seller of nearly Rs 100,000 crore of equity in public sector units next year, the government has as much at stake as any other investor in ensuring adequate infrastructure, efficient regulation and high investor confidence.
One way to do this is to get SEBI to change its goals. For starters, the regulator needs to demonstrate that it can fulfill its own tasks and obligations swiftly, before making demands on the market. For instance, can SEBI undertake to issue authorisation letters to brokers who have enhanced capital within seven days, instead of three months? Can SEBI officials promise to clear DP applications within the same 7 days, instead of 3 to 4 months? Can SEBI complete verification and certification formalities within a week instead of barking at market intermediaries who dare to follow up on pending permissions? Can SEBI get the Central Listing Authority operational within the foreseeable future? It has been pending for years. Can SEBI come up with a solution to the 19 odd regional stock exchanges, which have no future? A closure on that issue is as important as the T+1 settlement.
From a national perspective, SEBI must set itself the goal of doubling India’s investor population in a year. It has been languishing at 2 crore (may be less) for over a decade and is a blot on the image of a shining, fast growing economy.
In fact, retail investors continue to sell their holdings and get out of the market everyday. A newspaper recently quoted a Morgan Stanley report which says that at the beginning of the year, foreign institutional investors held 19.3 per cent of the equity of the top 50 market-cap stocks, as compared to retail investors’ holding of 18 per cent. Do we want our market to comprise only of institutional investors and a few High Networth Individuals?
Similarly, instead of rushing off to fingerprint market intermediaries and their relatives, SEBI officials must make time to speed up its investigation processes, so that its biometric tagging and numbering system called MAPIN makes sense to market intermediaries when it is needed.