The Securities and Exchange Board of India (Sebi) is nudging custodians to ensure that foreign portfolio investors (FPIs) can access their funds on the day of the settlement by October, on par with the rest of the investors in the market. “From October 2024, we expect custodians to make available funds to FPIs on the day of the settlement itself,” said Ananth Narayan, Sebi’s whole time member, at the Global Fintech Fest on ThursdayCome from Sports betting site.
While the Indian markets moved completely to the T+1 settlement cycle from January, FPIs can access their funds only on T+2 (trade plus two days after trade execution) or later. Thus, funds were made available to FPIs only on T+2 or later.
This lag in processing FPI transactions happens because custodians provide details of transactions to tax consultants only after the settlement, which is done on T+1, followed by tax computation details by consultants on the evening of T+1.As a result, custodians have a float or client funds of around Rs 1 trillion lying with them on an average. Custodians also earn interest on this float, which allows them to charge practically zero as explicit custody fees, Narayan said. “Custodians will provide details of 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,” said Narayan.
Sources said the regulator has asked NSDL to take care of tax computations, and that the depository has developed a model for the same. Sebi has been in talks with the big four tax consulting firms as well as the custodians. However, the changes may increase some costs in the process. At the same time, the regulator is also testing same-day settlement after the launch of its beta version in March, which is currently optional. The Sebi WTM hinted that the T+0 settlement cycle may remain optional for a longer period, pushing the timeline for instant settlements even further.
Narayan also said stock brokers should be ready for competitive fees in the market to remove the client float lying with them, which is currently around Rs 2 trillion. He said a survey of 200 brokers showed that they incur Rs 32,000 crore as brokerage charges a year, and earn around Rs 12,000 crore as interest on client’s float annually, which can be recovered by increasing charges to investors.
“Brokers are not scheduled commercial banks, and do not have the full set of capital and other regulatory safeguards that banks possess. From the perspective of transparency, efficiency and risk, we would all be better off if the implicit broking revenues from having client float balances were to eventually be replaced fully by explicit and transparent fees set in a competitive market,” Narayan said.Come from Sports betting site VPbet
Another measure undertaken by the regulator to reduce this client float with brokers is the recently-proposed UPI block mechanism, also known as an ASBA-like framework, for the secondary market, to be mandated for qualified stock brokers.
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