Sebi’s nudge to ensure FPIs receive funds on settlement day starting October 2024

Custodians–or clearing banks–will make funds available to Foreign Portfolio Investors (FPIs) on the day of the settlement itself from October after the Securities and Exchange Board of India (Sebi) gave them a nudge, the market regulator's whole time member Ananth Narayan G. said on Thursday,

While the securities settlement procedures had evolved over the years with the use of technology, payments and settlements in India were still paper-based and manual–prone to frauds, errors and delays–he told the Global Fintech Fest.

The intermediary ecosystem was typically the beneficiary of such inefficiencies, he said, adding that such inefficiencies not only affected the Indian investor but also FPIs. 

Narayan said brokers currently hold around ₹2 trillion of client funds on their books on a given day. About 90-95% of small value purchases (below ₹1 lakh) involve pre-funding the broker, while the actual settlement is due on a T+1 basis, he added.

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T+1 stands for trading day plus one business day.

To elaborate his point, he said that when India fully moved to a T+1 settlement cycle in January 2023, most FPIs were only able to access their funds from sale of securities on T+2 or later.

Before custodians can remit out funds to FPIs, they need to ensure that all taxes have been withheld as required, and as advised by a tax consultant. The custodians provide the details of transactions to the tax consultant only after settlement of the trade on T+1. 

The tax consultant provides the requisite details later in the evening on T+1 or beyond, thus making funds practically available to the FPI only on T+2 or later.

Narayan said that after Sebi’s nudge, custodians will now provide details of the FPI transactions based on inputs from the clearing corporations on T+0 evening itself, so that tax related formalities can be completed early on T+1–well in time for the funds to be remitted the same day.

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“From October 2024, we expect custodians to make available funds to FPIs on the day of the settlement itself,” he said.

Narayan said the beta version of the optional T+0 settlement window, introduced in March 2024, was launched to transition to an ambitious optional instantaneous settlement. 

“However, while the Sebi Board will ultimately provide us guidance in this regard, for now, perhaps continuing the optional T+0 settlement alone might be the more calibrated and prudent option,” he said.

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