Stock market: Sebi should not abandon his T + 1 plan despite pressure from the REIT


Mumbai: The Securities and Exchange Board of India (Sebi) is unlikely to move on its plan to introduce the T + 1 regulation next year as offshore funds prepare to pressure the finance ministry against new rules, said people with direct knowledge of the matter. The market regulator considers this move to benefit domestic investors, while foreign funds need only tweak their systems as they already follow a shorter settlement period for derivatives.

Foreign portfolio investors (REITs) have raised red flags over Sebi’s plans to reduce the time it takes to settle stock trades to T + 1 – or a day after the trade – from T + 2 currently. REITs say the new round of settlement will essentially require them to “pre-finance” their trades – that is, to pay for shares before they even get delivery. According to REITs, this will increase trading costs.

A senior Sebi official said this is nothing new for REITs as all of their current derivative transactions in India are pre-funded. In addition, all bids in initial public bids, where REITs are large participants, are pre-funded nine days before the actual award.

The official also cited the example of BSE, where REITs only contribute 5% of total trading volumes, excluding bulk trades.

“Domestic investors, including retail investors who account for almost 95% of the volume of the BSE spot market, will benefit from a shorter settlement cycle,” the official said. “Let the market be the judge of what is beneficial and what is not. If indeed the T + 1 settlement is so detrimental to investors, there will be no volumes in the T + 1 scripts. If the market thinks T + 1 is more efficient, all investors, including REITs, will adopt the shorter settlement.

Sebi published a circular on Tuesday authorizing the exchanges to offer selected scripts as part of a shortened T + 1 settlement from January 1 of next year. Currently, any spot trade that takes place today is settled the day after tomorrow, i.e. the investor will receive the shares to their account after two days. In T + 1, investors will get the shares in their accounts tomorrow the next day. The regulator considers that this makes the Indian markets more efficient.

The Ministry of Finance, ESB and NSE did not respond to questions.

The REITs are sticking to their guns and calling for the new rules to be withdrawn. The Asia-Pacific negotiating offices of several REITs, led by pressure groups, will seek appointments with various central government departments, including the finance ministry.

“New round of settlement unachievable”

“We thought the consultations were still ongoing, but now that Sebi has issued the final circular, we plan to take the issue on a war footing,” said an official of a Singapore-based fund. “We have repeatedly pointed out to Sebi that the T + 1 settlement is not possible for REITs for various reasons, but unfortunately the regulator has continued with the plan.”

Unlike normal investors, who buy and sell through simple transactions with brokers, REIT investments work differently, they say.

Suppose a REIT buys 100,000 shares of Infosys today, the trade will be executed through global custodians. After market hours today, the custodian sends the REIT a client note giving the fund details of the transaction. This is usually sent after market hours around 5pm everyday.

Based on this client note, the REIT must complete a foreign exchange transaction and transfer the money in rupees to the custodian. Custodians allow time until 12 noon the next day (T + 1) for the money to be sent into the current system.

However, under the new settlement, the money must be available from the custodian on the day of the transaction so that it can be settled the next day. Foreign institutions argue that such a transfer can be tricky for several funds, especially those located in the Western Hemisphere like New York or London, according to market participants.

The process

For example, the Indian custodian’s customer note is sent before 5:00 p.m. India time around 7:15 a.m. New York, which is outside of working hours. The investor will post the client’s note with the internal records and then book the trade on the forex which usually takes at least until the afternoon of New York time and therefore spills out beyond the date of the transaction in India.

“Over the past week, we have contacted the Finance Ministry with our buy side to request a meeting in anticipation of this decision, but we have not yet had a response from them,” said an internal memo sent. by the foreign fund lobby group Asia Securities. Association of Industry and Financial Markets (ASIFMA) to its members Wednesday.

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