T+1 settlement appears to be a good idea on paper. However, brokers and small investors are not too happy with it due to lack of infrastructure like banking services

Yesterday, Moneylife published an article T+1 settlement system proposed by SEBI: How will it benefit you? written by Gurpur. However, several of our readers, including brokers and investors have termed the T+1 settlement system as great idea only on paper. The banking system will be a big bottlenck to put T+1 into practice.

“Assuming cheque truncation system (CTS) comes into place and I get the cheque from the client at 6pm, where do I deposit it?  Even today, when the client pays on T+1 basis, it is the broker who pays the exchange from his own pocket, because the proceeds are realised only after two days. No tech savvy banks credit the proceeds on the same day. Banks may be tech savvy, people are not.  Even today, I write cheques because it is convenient to pay my bills although electronic clearing service (ECS) is available,” said one of the brokers.

Hemant, one of our readers, always get his shares directly from the exchange on pay-out day only. He says, “Even now people are allowed to sell shares, next day of purchase. The only risk is of short delivery, which investors have to bear. As per new system suggested, the buyer will have to pay T-1 (i.e one day before he/she purchases), so that broker has money, to pay-in the market. Hence I feel that, till we rectify the problems of banking system no point in advocating T+1 in the market.”

Another issue with the T+1 settlement is the transfer of shares from client’s demat account to brokers account in a short span. The trading closes at 3.30 pm. The process, however, gets over only by 5pm. This means only those who have given a power of attorney (PoA) for debiting shares can survive in this system. In short, small brokers who cannot provide depository participant (DP) services have to shut shop or tie up with clearing members for opening demat accounts to facilitate PoA system, the use and abuse of which is well known. Further the brokers cannot insist on a client to give a PoA or open a demat account where he wants.

Arun Adalja, another reader, feels the T+1 system is good but difficult in practice and may create problems for small investors who do not have internet facility readily available. “In such case (unavailability of internet) one has to carry the signed delivery instruction and his cheque book while visiting the DP. The visits to DP would also increase.”

There is already an option to pre-pay in case of heavy selling by a single client so that margin is released earlier. Brokers can always pay their clients a day earlier in case there is such requirement, provided the shares come into his account.

While the regulator wants to introduce T+1 system, brokers and investors, especially small investors seems to be reluctant to adopt it due to practical difficulties. But, of course, when has the regulator engaged with actual users of system. Retail participation in the stock market is decreasing day by day because of poor regulation and cumbersome rules. The T+1 concept is another step in that direction.