A plan by India’s securities regulators to shorten the settlement of stock transactions in the country would require complex and costly changes on the part of market participants and could reduce the country’s attractiveness to foreign investors.

In an open letter to Securities and Exchange Board of India (Sebi) chairman Shri Ajay Tyagi, three groups representing foreign portfolio investors (FPIs) in the country urged the regulator to put off the migration to a T+1 (trading day plus one day) settlement model, which is scheduled to take effect on January 1 2022, to give all stakeholders enough time “to identify, come up with, test and implement the operational processes and procedures required” for its safe implementation.

The groups – the Asia Securities Industry & Financial Markets Association (Asifma), the Asia Trader Forum (ATF) and the Investment Association (IA) ­– note that FPIs account for US$655 billion or roughly 20% of India’s market capitalization.

While recognizing the need to shorten the settlement cycle to improve market liquidity and reduce settlement risk, the groups highlight the “risks not only to investors but also to brokers, custodians and other market participants arising from failed trades or failed settlement that may impact the market as a whole due to the shortened settlement timeframe”.

They also note that they had not been consulted or given the opportunity to dialogue with Sebi, as well as the country’s stock exchanges, clearing corporations and depositories, before the T+1 circular was issued.

The migration to a T+1 settlement would require complex and costly changes such as end-to-end process redesign and substantial technology investments and enhancements to support near-real-time processing capabilities, which need an extended migration timeline.

This is particularly true for overseas investors, such as those based in the United States and Europe, due to time-zone differences and the involvement of multiple parties (e.g., global and local custodians, FX banks and brokers) in different jurisdictions. At least 64% of FPIs investing in India are from non-Asia jurisdictions, which means they are even more affected by a shortened settlement cycle, the groups say.

In the US, after the Securities and Exchange Commission supported a move from T+3 to T+2 settlement, it took the industry two years to develop the necessary processes and procedures and conduct the necessary testing before the move was achieved. When it was proposed in early 2021 that the US move to a T+1 settlement, a similar two-year timeline for the change was planned and industry participants are currently working hard to meet the 2023 timeline.

“FPIs are ready to work with SEBI, other regulatory authorities and market participants to identify and find solutions to the numerous operational (such as cut-off times for trade confirmations, funding, and securities borrowing and lending facilities to avoid failed trades or failed settlements) and business challenges (such as pre-funding, allocation and tracking error) that come with a shorter settlement cycle to ensure that India’s migration to a T+1 settlement can be achieved with little disruption or risk to the market and to preserve the market’s attractiveness to FPIs,” according to the open letter.