September 16, 2021
either/view ⚖️
Time to settle
To: either/view subscribers
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📰 FEATURE STORY
Pros and cons of SEBI’s T+1 plan to shorten settlement time
Stock market trading is a fast-growing industry in India. Recently, it has gained more interest among the people. We invest our money in shares and trade them at the opportune moment. When we buy or sell shares, it takes a couple of days or more to get our returns.
We have got to wait for those few days to do our next move. As investors, we would be benefited if we get the shares or money as soon as we buy/sell the shares. Keeping in mind the benefits, SEBI has allowed stock exchanges to opt for a reduced settlement period. However, foreign investors, brokers and few experts oppose this move. They claim that it involves a lot of risks and challenges.
Context
On September 9, the Securities and Exchange Board of India (SEBI) introduced the T+1 settlement cycle as an option in place of the T+2 settlement cycle. It released a circular allowing the stock exchanges to either opt for T+1 or T+2.
Breaking down, T in T+1 and T+2 refers to ‘Trading Day’. So, In T+2, the settlement cycle will take two more days other than the trading day to get completed. The T+1 settlement cycle means the settlement will be completed one day after the trading. The T+1 cycle option will be rolled out from January 1, 2022.
If any stock exchange chooses T+1, they have to stick to it for a mandatory minimum period of six months. If the stock exchange plans to shift back to T+2 they can do so by giving one-month advance notice to all of its stakeholders. Thereafter, for any subsequent shifts, they will have to stick to the minimum period and notice period as mentioned by SEBI.
Several investors and market experts have welcomed this move as it will reduce the settlement period and will provide liquidity to them. On the other hand, foreign investors and brokers complain that this move will adversely affect the stock market and also cause more chaos in the market system.
The T+1 settlement plan is a boon
As of now, the T+2 settlement is in practice. Under this settlement system, if you have sold your shares, the due money will be credited to the broker’s account only on the third day. You might receive it only on the fourth morning.
Say, you sold the shares on Monday. If your order is executed the same day, it will take a trading day plus two working days (T+2) for your broker to receive the settlement. In such a case, you will receive the payment by Thursday. Whereas in the new settlement plan of T+1, you will receive the settlement the very next working day. If you sold the shares on Monday, the settlement will be done on Tuesday.
So, as an investor, you will get the money a day earlier. This will help you plan and invest in other shares in your Demat account a day earlier than you can do right now. So, is this move profitable only for the seller, you ask? No, even as an individual who buys the shares, you will be benefitted. The shares purchased by you will be credited to your Demat account a day earlier as well. This will give you the option to sell the purchased shares immediately on the next day and will help you reap more profits.
Speeding up the settlement process leaves no room over the uncertainty of transactions made. It will also reduce the percentage of outstanding unsettled trade. If you think that such a shift will require changes at the base level, experts say that’s not the case. This move does not require large technical or operational changes. Additionally, this is not the first time SEBI has reduced the settlement time. It had earlier reduced the settlement period from T+5 to T+3 in 2002 and to T+2 in 2003.
When the number of outstanding unsettled trades are on the rise, there is a higher possibility of systemic risk. SEBI says that the reduction in the settlement period, in turn, will reduce the systemic risk involved. So, what are the other benefits of a shortened settlement cycle?
First off, this will boost the number of transactions happening in the stock market. More liquidity and quicker settlements ensure more security and additional days for investing. There is a possibility of more trades being undertaken, this will increase the retail investment.
As the turnover gets high, the brokers will benefit as well. This will lead to increased fees and will do good to all stakeholders in the market. More transactions will also favour economic development and will positively affect the GDP.
The T+1 settlement plan raises concern
Having said that, brokers, experts and foreign investors raise concern over the shortened settlement plan. Over 900 stockbrokers have written to SEBI regarding the same. What are their concerns?
To begin with, the brokers say that it would increase the working capital requirements of the brokers. This is because most clients who reside in remote villages or districts opt to pay through a cheque facility. This means that the broker might receive the payment late. In the end, the responsibility will fall upon the brokers to pay in and pay out within the settlement period. Pay in is the process of transferring the shares from the client’s Demat account to the exchange while selling. Payout is transferring the shares to the client’s Demat account while buying.
Banks and brokers might have to work for additional hours to help clients move the funds and securities on the trading day itself. Experts also say that some clients have a trading account and depository participant account with different entities. They will have to give instructions in transferring securities and it will be a tedious process to do within a day.
Broker associations claim that the available infrastructure is not equipped enough to meet timely issuance of pay in and payout. Sometimes the delay is at depository levels and sometimes it is at the Clearing Corporation level. With such operational difficulties, if SEBI shrinks timelines, it may result in a chaotic system. Additionally, experts assert that same-day payments will increase the workload and can lead to more errors.
It is also said that the shift to T+1 will result in the global investors facing multiple issues. The foreigners opine that foreign investment works differently and shortening the settlement time will affect their trade. The difference in geographical timings might affect the trade process and force foreign investors to pre-fund the transactions. They also have to predict the entry price in advance which is very difficult. By the time the transaction is tallied in a foreign place, it will exceed the transaction time allotted in India. The foreign investors keep their money generally in interest-earning investments. If they pre-fund (i.e.) deploy these funds a day in advance for the trade, they will lose out on the one-day interest. This makes trading in India more expensive for them.
The fact that the T+1 settlement cycle will boost retail investment is in itself seen as a major drawback. Experts say even if T+1 is a good move, it has come at the wrong time. The retail investment has been increasing by the day. More liquidity in the hands of new and amateur investors will encourage them to speculate more. It will cause more volatility in the market.
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🏴 STATE OF THE STATES
Full of ferns (Uttarakhand) – We have a variety of plant species across the length of our country. Among this vast collection, we have the ferns, which are plants that do not have flowers. Some ferns have medicinal properties, some are rare species and many others are threatened. But there is not much awareness about these plants. Recognising this drawback, the Uttarakhand state inaugurated India’s largest open air fernery in Ranikhet. Set in natural surroundings, the ferney is spread over four acres of land. The newly developed fernery is home to 120 different fern species and aims to promote further research. We are waiting to see more ferns making their way to this fernery.
Demolishing temples (Karnataka) – Recently, the Supreme Court ordered unauthorised places of worship be vacated in the state. This has got authorities thinking about getting rid of such illegal religious structures built on public properties. Following this, the Mysuru district administration had razed a temple and faced the heat from Hindu outfits. To stop further escalation of problems, CM Basavaraj Bommai has instructed authorities to not demolish temples immediately. He has assured that the issue will be brought up in the Cabinet meeting, after which clear guidelines will be directed. Well, till then, let’s closely watch the developments of the case.
Black tigers (Odisha) – If someone asks you what the colour of a tiger is, you would easily say orange. But here’s something interesting. Odisha is home to a rare kind of black tigers. For years now, these animals were considered mythical creatures. But now research has surfaced that the coat of these tigers are black due to a single mutation in their genes. These tigers particularly spotted in Similipal have arisen from a very small tiger population and are speculated to be inbred. What’s more interesting? Researchers say these black tigers are specific to Similipal and haven’t been found anywhere else in the wild. We have such fascinating fauna in our country!
Celebrating nature (Sikkim) – Our love for films has increased by the day. This is the reason why many social messages are presented in the form of films. Taking cue from this trend, Sikkim is rolling out a film festival based on the theme of nature in the state. The CMS Vatavaran Film Festival has collaborated with the United Nations Development Programme for this event. The program which will span from September 15-17 includes filmmaking workshops and screening of environmental films. The idea behind this film festival is to encourage discussion about Himalayan initiatives and conservation of nature. The films will talk about water conservation, forest conservation, climate change, sustainable livelihood, etc. If you are in Sikkim, do visit the Forest Department Secretariat in Deorali and engage in the important and fun festival.
Investing green (Goa) – Here’s your chance to do your bit in the battle against global warming. The Goa government has proposed a scheme whereby you can pay the government to reforest your vacant land and take care of it. Once you make your payments, the state biodiversity board will look after your plants with the utmost care. The scheme also has provisions for people to plant trees to celebrate birthdays, anniversaries and other memorable occasions. One individual can plant many trees and the photo of each tree will be shared with you annually. To plant your tree in a rocky terrain, you might have to pay ₹7,000. This amount will also include maintenance of the tree for the next five years. In other areas, the service will be charged at ₹5,000. Now, make a wise choice and invest for a greener planet.
🔢 KEY NUMBER
₹814 crore – Cost of PepsiCo’s greenfield food plant in Uttar Pradesh. Situated in Mathura, the plant is the largest greenfield investment in manufacturing in India by PepsiCo. The company aims to produce Lay’s potato chips in the plant. The plant will create 1,500 jobs in the state, and will procure 1,50,000 tonne of potatoes annually from 5,000 local farmers.