India
03 May 2023
Brian Bollen discusses India’s move to T+1 and its growing custody and funds landscape
Image: marcus/stock.adobe.com
The most recent and significant industry development in India has been the world-leading movement from a T+2 to T+1 settlement cycle. Phased in by the authorities to minimise market disruption, T+1 took full effect in January and has now become a fact of everyday market life.
“T+1 is progressing well, as we had the time to address technology and operational issues, although minor challenges around funding remain,” says Leena Aich, head of sales and client coverage, Securities Services India, Citi.
India’s reform zeal shows no sign of dissipating. While the US and Canada have decided to wait until 2024 before adopting T+1 for domestic equities, India has raced ahead with changes to its settlement cycle. Having previously operated a T+2 model, the Bombay Stock Exchange and National Stock Exchange of India have both successfully introduced the T+1 settlement cycle for all equities listed on their respective exchanges since 27 January 2023.
The decision by the Securities and Exchange Board of India (SEBI) to implement T+1 has been driven by a number of risk considerations. A shorter settlement duration will mean that investors incur less market and counterparty risk during the trading lifecycle, enabling them to benefit from reduced margin requirements and collateral optimisation.
With less capital trapped inside central counterparty clearing houses (CCPs), there will be greater liquidity available in the market. Aside from unlocking liquidity, T+1 could also help drive efficiencies in post-trade processes, which have historically been heavily intermediated and manually intensive. A T+1 model will encourage intermediaries, including custodians, to enhance existing technologies as well as adopt new ones in an effort to improve automation within the industry.
Implementation of T+1 required custodians to revise the instruction cut-off time for clients, make necessary changes to FX and funding arrangements, and enhance system capabilities to accommodate the new cycle.
“Standard Chartered made necessary changes in the local settlement system well before the market went live, and also introduced a night desk to process client instructions that are received overnight,” affirms Standard Chartered Bank’s Margaret Harwood-Jones, global head of financing and securities services.
An investment destination
Geopolitical tensions are impacting investment flows, particularly as the war in Ukraine rumbles on. Yet despite this, India’s attractiveness as an investment destination remains. It has demonstrated itself to be a fast-paced market since the opening up of the economy and has macro stability, despite three challenging pandemic years.
It also boasts a strong external sector, political stability and sound policy measures. From a structural perspective, it has a young population (50 per cent of the population is below the age of 25) and it is likely to be the third-largest economy by end of the decade. These are both key positives — especially in an environment where the world is looking to diversify its manufacturing base to more reliable locations.
The Indian government has been pursuing a series of reforms over the past several years to boost private investment and improve macroeconomic stability. Corporate tax rate cuts, the implementation of insolvency and bankruptcy code, production-linked incentive schemes, inflation targeting and a large-scale clear-up of the banks balance sheets place India in a unique position.
Some of the changes seen in the market to support this unique position include domestic reforms and growth agendas by capital markets regulators and government. Changes are intended to drive the regulatory transparency of different investment entities, promote investment activities and ensure appropriate risk governance, such as changes to the SEBI master circular for foreign venture capital investors.
Custody services
The competitive landscape has remained largely unchanged for custody business for institutional investors; the wallet is shared primarily among five large foreign custodian banks.
There is competition in the domestic custody and fund services space from local service providers, affirms Harwood-Jones. “For example, large local banks’ securities services businesses and brokerage houses have been aggressively winning market share with competitive pricing. Counterparty risk has also emerged as a key evaluation criteria in the selection of foreign and domestic providers, as well as the ability to access holistic solutions.
“No new custodians have emerged in the last couple of years, but we have seen a few existing providers specialise in niche asset classes, such as being a custodian for commodities, and those catering to domestic alternate investment funds (AIF) and portfolio management service providers. No existing provider has left the business.”
She adds: “Most custodians in India support both the domestic asset manager’s investment in India, as well as foreign investors accessing India aross portfolio, venture capital and strategic investment routes. Those custodians who have an international network, such as Standard Chartered, are using the same to facilitate the domestic asset manager’s investments in markets outside India.”
Dr Bhaskar Dasgupta, non-executive director of Apex Group’s MENA and India boards, says: “India continues to be seen as a safe investment destination for various reasons, including its strong growth, responsive and progressive government and receptive regulators that are willing to hear constructive criticism about enhancing the country’s business and financial frameworks.
“India has shown itself to be a resilient and adaptable market, and we see huge opportunity for growth both domestically, created by a thriving and expanding private equity and venture capital sector, and in connecting Indian capital to other international financial centres.”
With rising global fears around recession and spiking inflation, there are fears about the stability of some of the world’s leading financial hubs. However, there’s undoubtedly room for optimism where India is concerned. India’s fund management and banking sectors have shown impressive growth, but targeted action could unleash further potential.
International banks, such as J.P. Morgan, Citi, HSBC and Standard Chartered, provide all aspects of fund and custody services to large players in the market, both international and domestic.
Domestic players such as SBI, Edelweiss and Kotak focus primarily on other domestic players. There are also specialised, independent international providers, such as Apex Group, who serve international and domestic clients of all sizes.
The fund, custody and securities services providers in India have remained relatively consistent since the 2008 Financial Crisis. As Dasgupta explains: “For any international service provider seeking Indian growth, India cannot be considered an ‘offshore’ centre. To ensure success, it must be considered a key strategic location for delivering high-quality services for clients, whether they are in India, Indonesia or Ireland.”
He adds: “Consolidation in the fund services sector, while advanced in other geographies, such as Oceania and Europe, is only just beginning in the Indian market. There have been no significant exits by fund services providers there. However, reputation is exceptionally important, with a significant proportion of new clients referred by existing satisfied and long-tenured clients.
“The global talent market, especially in India, has become more competitive than ever before. Service providers need to embrace new ways of thinking about how they grow headcount and fill critical roles. Global businesses operating and growing in India can set themselves apart as an employer of choice by emphasising the development and promotion opportunities they can offer Indian employees.”
“T+1 is progressing well, as we had the time to address technology and operational issues, although minor challenges around funding remain,” says Leena Aich, head of sales and client coverage, Securities Services India, Citi.
India’s reform zeal shows no sign of dissipating. While the US and Canada have decided to wait until 2024 before adopting T+1 for domestic equities, India has raced ahead with changes to its settlement cycle. Having previously operated a T+2 model, the Bombay Stock Exchange and National Stock Exchange of India have both successfully introduced the T+1 settlement cycle for all equities listed on their respective exchanges since 27 January 2023.
The decision by the Securities and Exchange Board of India (SEBI) to implement T+1 has been driven by a number of risk considerations. A shorter settlement duration will mean that investors incur less market and counterparty risk during the trading lifecycle, enabling them to benefit from reduced margin requirements and collateral optimisation.
With less capital trapped inside central counterparty clearing houses (CCPs), there will be greater liquidity available in the market. Aside from unlocking liquidity, T+1 could also help drive efficiencies in post-trade processes, which have historically been heavily intermediated and manually intensive. A T+1 model will encourage intermediaries, including custodians, to enhance existing technologies as well as adopt new ones in an effort to improve automation within the industry.
Implementation of T+1 required custodians to revise the instruction cut-off time for clients, make necessary changes to FX and funding arrangements, and enhance system capabilities to accommodate the new cycle.
“Standard Chartered made necessary changes in the local settlement system well before the market went live, and also introduced a night desk to process client instructions that are received overnight,” affirms Standard Chartered Bank’s Margaret Harwood-Jones, global head of financing and securities services.
An investment destination
Geopolitical tensions are impacting investment flows, particularly as the war in Ukraine rumbles on. Yet despite this, India’s attractiveness as an investment destination remains. It has demonstrated itself to be a fast-paced market since the opening up of the economy and has macro stability, despite three challenging pandemic years.
It also boasts a strong external sector, political stability and sound policy measures. From a structural perspective, it has a young population (50 per cent of the population is below the age of 25) and it is likely to be the third-largest economy by end of the decade. These are both key positives — especially in an environment where the world is looking to diversify its manufacturing base to more reliable locations.
The Indian government has been pursuing a series of reforms over the past several years to boost private investment and improve macroeconomic stability. Corporate tax rate cuts, the implementation of insolvency and bankruptcy code, production-linked incentive schemes, inflation targeting and a large-scale clear-up of the banks balance sheets place India in a unique position.
Some of the changes seen in the market to support this unique position include domestic reforms and growth agendas by capital markets regulators and government. Changes are intended to drive the regulatory transparency of different investment entities, promote investment activities and ensure appropriate risk governance, such as changes to the SEBI master circular for foreign venture capital investors.
Custody services
The competitive landscape has remained largely unchanged for custody business for institutional investors; the wallet is shared primarily among five large foreign custodian banks.
There is competition in the domestic custody and fund services space from local service providers, affirms Harwood-Jones. “For example, large local banks’ securities services businesses and brokerage houses have been aggressively winning market share with competitive pricing. Counterparty risk has also emerged as a key evaluation criteria in the selection of foreign and domestic providers, as well as the ability to access holistic solutions.
“No new custodians have emerged in the last couple of years, but we have seen a few existing providers specialise in niche asset classes, such as being a custodian for commodities, and those catering to domestic alternate investment funds (AIF) and portfolio management service providers. No existing provider has left the business.”
She adds: “Most custodians in India support both the domestic asset manager’s investment in India, as well as foreign investors accessing India aross portfolio, venture capital and strategic investment routes. Those custodians who have an international network, such as Standard Chartered, are using the same to facilitate the domestic asset manager’s investments in markets outside India.”
Dr Bhaskar Dasgupta, non-executive director of Apex Group’s MENA and India boards, says: “India continues to be seen as a safe investment destination for various reasons, including its strong growth, responsive and progressive government and receptive regulators that are willing to hear constructive criticism about enhancing the country’s business and financial frameworks.
“India has shown itself to be a resilient and adaptable market, and we see huge opportunity for growth both domestically, created by a thriving and expanding private equity and venture capital sector, and in connecting Indian capital to other international financial centres.”
With rising global fears around recession and spiking inflation, there are fears about the stability of some of the world’s leading financial hubs. However, there’s undoubtedly room for optimism where India is concerned. India’s fund management and banking sectors have shown impressive growth, but targeted action could unleash further potential.
International banks, such as J.P. Morgan, Citi, HSBC and Standard Chartered, provide all aspects of fund and custody services to large players in the market, both international and domestic.
Domestic players such as SBI, Edelweiss and Kotak focus primarily on other domestic players. There are also specialised, independent international providers, such as Apex Group, who serve international and domestic clients of all sizes.
The fund, custody and securities services providers in India have remained relatively consistent since the 2008 Financial Crisis. As Dasgupta explains: “For any international service provider seeking Indian growth, India cannot be considered an ‘offshore’ centre. To ensure success, it must be considered a key strategic location for delivering high-quality services for clients, whether they are in India, Indonesia or Ireland.”
He adds: “Consolidation in the fund services sector, while advanced in other geographies, such as Oceania and Europe, is only just beginning in the Indian market. There have been no significant exits by fund services providers there. However, reputation is exceptionally important, with a significant proportion of new clients referred by existing satisfied and long-tenured clients.
“The global talent market, especially in India, has become more competitive than ever before. Service providers need to embrace new ways of thinking about how they grow headcount and fill critical roles. Global businesses operating and growing in India can set themselves apart as an employer of choice by emphasising the development and promotion opportunities they can offer Indian employees.”
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