A delegation of Indian regulators visited Hong Kong last week to spread the word about straight through processing in India. They claim that a new secure messaging system launched on December 2 is the first step towards shortening India's settlement cycle to T+1. A goal that they plan to achieve by 2004. FinanceAsia spoke to the chairman of the Securities and Exchange Board of India (SEBI), GN Bajpai, and the managing director and CEO of the National Securities Depository Limited (NSDL), CB Bhave.
What's the reason for your trip to Hong Kong?
Bajpai: We wanted to come and spread the word to foreign institutional investors and fund managers about the improved efficiencies in India's securities settlement process. We haven't been here for some time and we thought it was time to update the investor public. The message is that the Indian economy is going well, inflation is under control and unemployment continues to go down. Indian corporations will be declaring good results this year and the capital markets are highly undervalued. So we have been spreading the message that India is a great place to invest and that it is now also an easier place to invest.
What initiatives have you launched to encourage foreign investors?
Bajpai: Several things. We have simplified the procedure for the registration of foreign institutional investors which has reduced the time it takes from about four weeks to 14 days. And we have reduced the registration fees from $10,000 to $5,000. Our plan is to cut the registration time in half again to seven days once the Reserve Bank of India gives us the power to automatically approve applicants under the foreign exchange management rules.
Tell us about your latest initiatives to enhance straight through processing (STP) in India.
Bhave: These STP initiatives have been a response to a general announcement from SEBI that it wants to reduce the settlement cycle from the current T+3 to T+2 by April 2003, and then possibly to T+1 by April 2004. In order to achieve this we will have to reduce the amount of time it takes to execute and settle a trade by improving the communication between the three relevant parties - the brokers, the custodians and the fund managers. At the moment this interaction is still very manual and paper-based. But the new secure messaging system that is now being offered by NSDL, and soon others, has automated the communication between parties.
Exactly what does this secure messaging involve?
Bhave: There are two parts to the secure messaging system. SEBI mandated that we use the internationally recognized and accepted 15022 messaging format so that outside investors would not need to change their messaging systems in order to operate in India. The other mandate was that the messages needed to be sent in a secure environment, meaning that documents would need to be digitally signed by a certificate provided through an approved entity. NSDL is the first entity to offer these digital signatures.
You set a deadline of December 2 for implementing this new messaging system. Has that been met by market participants?
Bajpai: On day one we had 100% of the custodians using it, 50% of investment managers and about 10 brokers. And these are just domestic fund managers and brokers because the foreign market participants already have their own forms of electronic communication.
Will you be penalising those that haven't complied?
Bajpai: No, there are no penalties because the conversion is optional. We think that once they see the benefits of the system they will be encouraged to sign up on their own will. Once their counterparties are using the system and it is obvious that they are achieving time and money savings, the rest will be converted.
Have you now disbanded the STP steering committee that was set up to map the path to T+1?
Bajpai: The committee has done its task but it will meet again and again to review progress. It is still active.
What is the next step in the STP process?
Bajpai: T+2, which we hope to achieve by April 2003.
What is your biggest hurdle to shortening the settlement cycle?
Bajpai: We are breaking down these barriers one by one. We now have scripless trading in India, and once this electronic messaging system is running smoothly we are confident that we can go to T+2. After that we will continue to work with the Reserve Bank of India to achieve real-time gross settlement which is what is need to go to T+1.