How the T+2 rolling

settlement in the equity

market is subverted to
benefit intermediaries

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+ COMMENT

Gurpur | 02/05/2011 11:52 AM |

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 nondelivery 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?
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