The transition to the T+1 settlement cycle this month is likely to impact trading volumes in top stocks by foreign portfolio investors. All largecap companies will switch to T+1 from January 27, marking the completion of a process which began in February last year.
FPIs may reduce the number of transactions as investors do not want risk penalty or franchise risk. “Whenever there is a significant change in the market dynamics of a region in which they invest, FPIs either hold back or temporarily limit the number of transactions. This may result in a drop in volumes. FPIs will also have to pre-fund their transactions in India, which may result in higher costs,” said a person familiar with the matter.
The impact on buy-and-hold type of FPIs will largely be confined to the time of placing the orders or bringing in funds, according to experts. These include the likes of sovereign wealth funds, pension funds and even asset managers. The impact on FPIs such as hedge funds, which resort to daily or regular transactions, may be much higher.
FPIs are expected to face operational challenges in adjusting to the new regime because of the difference in time zones. This is especially so for the US and European investors. Once the shorter settlement cycle kicks in, forex has to be booked either late in the evening of trade day or early morning the next day.
Clearing corporations have agreed to push the deadline for equity trade confirmations to 7 am on T+1 day from 7 pm on trade day envisaged earlier. Failing to adhere to this timeline would mean that the obligation to settle trade would devolve on contracting brokers as hand delivery.
The securities settlement for FPIs is operationally complex, involving coordination among multiple entities like fund managers, custodians, brokers, clearing members, and the exchanges.
“Initially, ticket size may potentially reduce as investors would like to be exposed to lower risks and obligations. Forex risk and costs will exponentially increase. Overseas investors and global custodians may prefer other emerging markets, which are relatively in line with their system and service capabilities and lower in costs,” said Viraj Kulkarni, founder, Pivot Management Consulting, in a recent note. Tax firms may have to provide tax certificates at shorter notice, increasing costs and commitments, he added.
The turmoil in global equities, actions of central banks worldwide and geopolitical tensions have added to the volatility in FPI flows in the past year. FPIs have net sold equities worth over $2 billion this month, according to data from NSDL. Last year, these investors had sold shares worth $16.5 billion.
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