Regulations
How the T+2 rolling settlement in the equity market is subverted to benefit intermediaries

Under the system introduced eight years ago to protect investors, investors still bear the risk of non-payment and non-delivery of shares due to inefficiency of stock exchanges and intermediaries. It is time SEBI penalises those who have benefited from this and compensate investors who have suffered silently

The Securities and Exchange Board of India (SEBI) introduced the T+5 rolling settlement in the equity market in July 2001 and subsequently shortened the settlement cycle to T+3 in April 2002. After having gained experience from the T+3 rolling settlement and taking other steps such as introduction of straight through processing (STP), SEBI further reduced the settlement cycle to T+2, hoping to reduce the risk in the market and protect the interest of investors.

Accordingly, the T+2 rolling settlement was introduced from 1 April 2003. The calendar of events / activities for T+2 rolling settlement as proposed by SEBI at the time, were as follows.

* Confirmation of trades by custodians latest by 11am on T+1. A provision of an exception window would be available for late confirmations. The time limit and the additional charges for the exception window would be decided by the exchanges.

* The exchanges / clearing house / clearing corporation would process and download the obligation files to the brokers' terminals latest by 1.30pm on T+1.

* DPs shall accept instructions for pay-in of securities by investors in physical form at least up to 4pm and in electronic form up to 6pm on T+1.

* The depositories would accept requests from depository participants (DPs) till 8pm for 'same day processing'.

* The depository would permit the downloading of the pay-in files of securities and funds till 10.30am on T+2 from the broker pool accounts.

* The depository would process the pay-in requests and transfer the consolidated pay-in files to the clearing house / clearing corporation by 11am on T+2.

* The exchanges / clearing house / clearing corporation would execute the pay-out of securities and funds latest by 1.30pm on T+2 to the depositories and clearing banks and the depositories and the clearing banks would in turn complete the process by 2pm on T+2.

In actual practice, there is a considerable variance between what was proposed and what is implemented today, as detailed here below.
This is how the trades are conducted today by one of the leading broking intermediaries in a computerised environment and in respect of on-line transactions conducted by thousands of investors.

Purchase transactions
"I enter into a buy transaction on Monday through an on-line trading window provided by a broker, without any manual intervention, on earmarking necessary funds in my bank account. The broker issues a contract note on the same day for the purchase done on that day.
My bank account in respect of this deal gets debited with the deal value including brokerage, taxes, etc on Tuesday, that is T+1.
My DMAT account gets credited with the shares purchased on Thursday, that is T+3."

Sale transactions
"I enter into a sale transaction on Monday through on-line trading after ensuring that the requisite shares are earmarked for sale in my DMAT account. The broker issues the contract note on the same day for the sale of shares done on that day.
My DMAT account in respect of this deal gets debited with shares sold on Tuesday, that is T+1.
My bank account gets the credit for the sale proceeds after deducting brokerage, taxes, etc, on Thursday, that is T+3."

The above cycle takes place during the week, when both the banks and the stock exchanges work without any holidays. The practice followed by other broking intermediaries may marginally vary from what is stated above, but in all cases, there is marked variation from the laid down guidelines.

It is clear from the above that what was intended by SEBI while introducing the T+2 trading cycle has not been implemented either in letter or in spirit, and the Stock Exchanges and the intermediaries have devised their own settlement cycle to the detriment of the investors. It is not known, whether this cycle has the blessings of SEBI.

The investors have the right to seek answers to the following questions:
1. Who bears the risk of non-payment for two days in respect of shares already withdrawn from the investor's DMAT account?
2. Who bears the risk of non-delivery of shares for two days, for which the investor has already made the payment?
3. Even a day's delay in delivery of shares purchased by the investor can result in his facing the risk of a fall in prices due to volatility in the market. Why should he bear this risk for no fault of his/hers.
4. Who enjoys the float funds for two days at the cost of investors?
5. Who has allowed this variation from the intended settlement system, where the risk was much less to the investors?

If the investor has to bear the risk of non-payment or non-delivery of shares for the inefficiency of the stock exchanges or the intermediaries, it is incumbent on the part of SEBI to take immediate steps to rewrite the rules of the game and ensure that the interests of the investors are protected. SEBI should also investigate to find out as to who has benefited by this changed settlement cycle followed since April 2003, and based on the principle of "undue enrichment of those not entitled", should ask those intermediaries who have benefited, to compensate the investors by working out an appropriate formula, thereby serving the cause of investors who have suffered silently so far.  

It is worthwhile to mention here that in the wake of the security scam involving Harshad Mehta, revealed by journalist Ms Sucheta Dalal, in April 1992, the Reserve Bank of India (RBI) had completely overhauled the payments procedure in the government securities market and devised a full-proof payment and delivery mechanism called 'Delivery versus Payment' (DvP) system, which is worthy of emulation by the stock exchanges.

DvP is the mode of settlement of securities wherein the transfer of securities and funds happen simultaneously, on the same day. This ensures that unless the funds are paid, the securities are not delivered and vice versa. The DvP system completely eliminates the settlement risk in transactions. The banks and other players in the gilt-edged securities market have immensely benefited from this arrangement and it has been working very well for more than 15 years.

In the present context of all stock exchanges and the depositories being run on sophisticated computerised platforms, and the banks in our country being better equipped now to transfer funds on a real-time basis under the Real Time Gross Settlement System (RTGS), there is no reason why the capital markets cannot follow in the footsteps of the RBI to give investors in the capital market the same level of safety, security and comfort enjoyed by the participants in the gilt-edged securities market.

If this improved settlement system is followed, SEBI could even consider bringing forward the settlement cycle to T+1, which will greatly enhance the credibility of the capital market in our country, benefitting all the players and the economy of our country as well.

Is it not better to upgrade the settlement system now than to wait for another scam to happen and then think of improvement as normally happens in our country?

(The author is former managing director and CEO of a mutual fund. He writes for Moneylife under the pen name 'Gurpur'.)

User

COMMENTS

Subrata Das

6 years ago

I operate through Geojit BNPP who I selected out of many after studying their systems.

I maintain my DMAT A/C with them and my Bank A/C is also linked to their system.

Their trading facility ensures that margins are available either by cash or securities.

If I execute a sale transaction , and the share is notified as a 100% Delivery Scrip, their system will not allow the order unless the stock is held.For other shares they have their margining system as per Exchange notifications.This margin must be available in cash & Securities.I have found that about 50 % of the current value of existing stock in their DMAT A/C is treated as margin.If I sell and do not square off or deliver, the auction system will square off my position and all differences will be debited to my a/c.If Ido not have sufficient cash margin, the broker will sell my existing securities to recover its dues for which my undertaking is already with them.

Same for buying.

Moral of the story : Choose your Broker after due dilligence.

Pankaj

6 years ago

It seems the author has pickedup few specific points out of contexts and started his article writing without going thru in detail abt the process involved... further, few comments offred below by my fellow readers are also suggest that procedures are not properly understood by many.

Hence, i would like to clarify few points..

1. Exchanges as RBI are perfectly following the same principle as RBI i.e. when they receive payment from broker in pay-in at T+2 (10.30 a.m.), then only they release shares at T+ 2 (1.30 p.m.). Similarly, they release payout to broker only at T+ 2 (1.30 p.m.) when they have recd shares in payin fro broker before it i.e. T+2 (10.30 a.m.). So where it is wrong.. It is the practise followed by every single stock exchange in the world...

2. w.r.t. to question no. 1,2 raised abt gurantee... let me educate the author that all trades on exchange platform are guranteed by settlement gurantee fund and so in case of non delivery by any party for any reason, let it be 9-11, it is guranteed..


3. Moreover, points mentioned about T +1 mechanism in article applies to Custodial trades (More of Inst. trades) and not for marginable trades. so naturally, Broker has to keep funds ready on T+1 evening to pay it on or before next day morning 10.00 a.m.. So what is wrong in taking money on T or T + 1 day. Infact, funds are sometimes only earmarked in client bank account so that only when the trades turns into a delivery trade, broker would trf it to the extent of contract note obligation. Why the investor has to cry for the trade fully done, already commited his funds and still trying to see that broker do not take funds for payin purpose...
4. Moreover, by asking undue, unreasonable benefits in the name of investor, Authotor seems to have foregotton that any delay in payin of securities by Client may result into auction and may damage investor financially hugely..
5. Also note that in case on non-online trades, where investor still issues chqs which consists of more then 75% of investor community, it still takes 2-3 days in clearing and broker has to fund those purchase transaction on behalf of such clients.
7. Even in online trades, funds remains in current account of bank on behalf of broker just for 1 day and I am sure that even author is aware that no bank gives interest on current acount balance or float for 1 day (huge may be the amount)

Would suggest few of you to go back to rule book, understand the rules of the games and they play rather then critising it sitting in fence... No one inviited the investor to invest in stock market and better enjoy MF games. U have to play the game as per stock market rules.. or become broker, settle ur trade urself..

REPLY

Bosco

In Reply to Pankaj 6 years ago

My beef is with my online securities (3-in-1 account).
I also have a regular broker & i have no issues with him as i know his difficulties (particularly the cheque clearing time which as pointed out by you is atrocious) .
But with a 3-in-1 account , and living in the present age, i see no reason why (a) my bank cannot debit me in the early hours of the payin-day when the funds are already locked, and (b) why they need to adjust the funds due to me from payout's against payin's due a couple of days later instead of crediting me my money & allowing it to gain a couple of days interest.
They may not EARN any interest on the 1-2 days float as you say, but they are CERTAINLY GAINING by saving a huge amount by denying me & lakhs of other investors interest all through the year.

Hemant Bhatia

In Reply to Pankaj 6 years ago

I fully agree with you.By the way,whenever i make purchases,my broker gets payment next day & on payout day i directly get shares from the excahnges(T+2),and on sale of shares i get sale proceeds on payout day itself i.e T+2.

Bosco

6 years ago

Congratulations on your article .... for a couple of years now i had been thinking off & on of writing to you about one aspect of the settlement - pt 4 in the article - the fact that my bank enjoys my funds for 1-2 extra days thus reducing my interest to the same extent ( i have a 3-in-1 account with HDFC Bank). It may not appear a big deal, but when millions of investor accounts are considered, it actually is .

There is no reason why the banks having this 3-in-1 facility (bank-demat-securities accounts) cannot deduct the funds on the morning of the pay-in, after all the funds are already on "hold" from the minute the order is placed, so there is no danger of there being any default . In this way the investor will not lose interest unnecessarily.

atul

6 years ago

Well if SEBI , intermediaries , promoters , AMC's (author is former director !)are all bogus then might as well appeal to close the capital markets altogether. No amount of investor awareness too is helping in any way !!
So why let something so toxic run. As per moneylife investor population is dwindling - so I think day is not far when all these things will die a natural death.It will be better for people to move to unregulated markets like real estate, maybe opening up of betting will do good to investors do their asset allocation.

jigar shah

6 years ago

we appriciate ur concern as a sub broker

KUMAR

6 years ago

SEBI PRETENDS & CHIDES ITSELF IT IS WORKING FOR INVESTORS' INTEREST & PROTECTION! BUT IT HAS NEVER!
MY BROKER HAS A SYSTEM IN PLACE WHERE MY SHARES ARE RETAINED BY HIM FOREVER UNLESS I KEEP ASKING THEM & HAGGLING WITH THEM TO DELIVER SHARES I PURCHASE INTO MY DP ACCOUNT. THE SAME WITH THE MONEY IF I SELL ANY SHARES! UNLESS I RELENTLESSLY PURSUE WITH THEM TO GIVE ME MY MONEY, THEY NEVER DO! THEY ARE THE BIG ADVERTISERS CALLED ANGEL BROKING FOOLING LAKHS THROUGH THEIR ADS!

THEY HAVE HUGE QUANTITY OF CUSTOMERS, BUT LIKE IN A FOOL'S PARADISE, THEY THINK THEY HAVE GOOD CUSTOMER SERVICE, WHICH IS NO BETTER THAN ANY GOVT. ORGANIZATION!

NOBODY IS BOTHERED THERE FOR ANY COMPLAINTS, EVEN AT THE TOP MANAGEMENT LEVEL!

SEBI'S SQUINTED EYES HAVE SUCKED UP MILLIONS' OF INVESTORS' INTEREST!



REPLY

citizenindia

In Reply to KUMAR 6 years ago

change your broker

Anil

6 years ago

Its excellent that you are picking up this issue of short changing end users all across. I wrote to HDFC Securities on more than one ocassion, spoke as well NO RESPONSE or correction. T+1 for debit and T+2 for credit .... blatant violation ...
I trust this forum helps to resolve this

Sunil

6 years ago

Brokerages offering on-line trading (3-in-1) accounts have now gone a step further. Shares sold out of the Demat account held with them are DEBITED IMMEDIATELY on the SAME DAY (T+0) whereas Funds are paid out, ONLY IF INVESTOR asks, on T+3. Similarly, Shares bought are credited on T+3 to Beneficiary account but Investor is made to pay ON T+1 even if it is a holiday or a Saturday, else Delayed Payment Charges are debited to Ledger for all 3 days ! SEBI and NSDL just act as a (bad) postman and forward complaints by Investors to concerned Brokerage or DP, with a delay of few months, and do not keep any tab on redressal time or quality..Investor Protection is only for lip-service !

REPLY

SANarayan

In Reply to Sunil 6 years ago

I too have had the same experience as you with Stockholding Corpn of India Services Ltd.Sometimes they dont credit demat a/c for a week!

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