In a significant move to modernize India’s financial markets, leading multinational banks are advocating for the Reserve Bank of India (RBI) to modify existing regulations to facilitate same-day settlement of stock trades, commonly referred to as T+0 settlement, for foreign portfolio investors (FPIs). This change is poised to streamline trading processes, allowing investors to buy and sell shares with the assurance of immediate financial transactions.
The Need for Same-Day Settlement
Currently, foreign portfolio investors face challenges with the existing T+1 settlement cycle, which necessitates that transactions are settled one business day after the trade is executed. By shifting to T+0, both buyers and sellers would complete their transactions on the same day. This expedited process is especially beneficial for FPIs operating across different time zones, as it allows for quicker access to funds and reduces the risk associated with fluctuating currency rates.
Bankers emphasize the necessity for a regulatory framework that permits banks to manage intra-day funding more effectively. The proposed amendment would enable FPIs to secure funds during the trading day, ensuring that transactions are squared off by the end of the trading session. Such an arrangement is expected to enhance market liquidity and attract more foreign investment into India, reinforcing the country’s position as a key player in the global financial market.
Regulatory Framework and the Role of RBI
To implement T+0 settlements, a crucial directive from the RBI is required to permit banks to issue irrevocable payment commitments (IPC) for trades conducted by FPIs. Under current regulations, FPIs cannot borrow freely from local banks, which complicates their ability to engage in same-day trading. An IPC would allow custodian banks to facilitate the settlement process by releasing funds for the trade and subsequently recovering the amounts once the dollars are credited to their nostro accounts.
Recent discussions among bankers indicate that the Securities and Exchange Board of India (SEBI) is keen on having custodians prepared for T+0 settlements by late December or early January. This initiative aligns with SEBI’s commitment to improving market efficiency before the chairperson’s term concludes in February 2025. Industry experts believe that with the introduction of T+0, India could emerge as one of the pioneering nations to implement same-day pay-in and pay-out systems for securities transactions, a move that would be highly regarded in the international investment community.
Challenges and Considerations for Implementation
While the potential benefits of T+0 settlement are substantial, its implementation presents several challenges. One major concern is the operational capacity of custodians and accounting firms, which would need to adjust their processes to accommodate same-day transactions. Currently, accountants handling FPIs are required to generate mandatory ‘confirmation certificates’ for T+1 trades overnight. Under a T+0 framework, the time constraints would become more pressing, requiring a reevaluation of existing processes to ensure compliance and accuracy.
Industry experts, including Rajesh Gandhi, a partner at Deloitte, underscore the importance of allowing IPC issuance by the RBI for the success of T+0 settlements. He stated, “Once this is done, FPIs will be able to pay for the purchase of securities on the date of purchase and receive sale proceeds in foreign currency on the same day. This capability would position India as a leader in innovative financial practices.”
Wrap-up
One of the most important steps in modernising India’s financial system is the suggested switch to same-day settlement of stock trades for international portfolio investors. The RBI and SEBI should open the door for more effective trading methods that benefit both domestic and global investors by removing regulatory obstacles and improving operational procedures. India has the chance to take the lead in implementing progressive trading procedures that might increase its attractiveness as a global investment destination as the financial sector embraces innovation more and more.
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