At a meeting on Tuesday, the Indian capital market regulator has told the accounting biggies in no uncertain terms to generate the mandatory ‘confirmation certificate’ overnight so that offshore funds managers can repatriate the money from the sale of stocks here to other international markets the very next day.
Under the regulations, FPIs have to submit confirmation reports to the authorised dealer banks every time they transfer funds out of India to invest elsewhere. The banks, which arrange the remittance and also act as custodians of the FPIs, receive the certificate from the accounting firms to figure out the quantum of tax that has to be withheld before funds are repatriated.
After the market closing hours, clearing corporations send the trade information to the custodian banks which share the data with the Big Four and other accounting firms which handle the accounts of the FPIs.
The accounting firms receive the information from the custodians later in the evening of the day the trade happens. The tax certificates are generated the next day and shared with the custodian banks by evening. Since the foreign exchange market is not active in the evening, it’s not possible for FPIs to remit the money that day.
TO GET BENEFITS OF T+1 TRADE
According to persons aware of the discussions, senior officials of the Securities & Exchange Board of India (Sebi) have made it clear that this must change so that FPIs can reap the benefits of the T+1 (trade plus one day) settlement cycle. Given a choice, FPIs would prefer having the flexibility and time-window to deploy the money in other markets.
“Sebi wants the custodians and the accounting firms to speed up their systems so that FPIs can remit money the next day of the trade. So, if a Big Four receives data at 8 p.m. or 9 p.m. on the day of the trade, it now has to generate and send the report to the banks by around 9 a.m. the next day. Even though an FPI which sold stocks (on T day) would receive the sale proceeds at about 1 p.m. (on the T+1 day), it can buy dollars between 9 a.m. and 1 p.m. (on the T+1 day) in the forex market, and remit the funds soon after the money is credited to its bank account,” said an industry person.
Sebi is categorical that the accounting agencies must use the 12 hours, between 9 p.m. (of the previous day) and 9 a.m. (of the next day), to produce the certificate – an instruction that has understandably not gone down well with many in the Big Four.
“I don’t think they have a choice, though the certificate typically takes some time. The tax liability is computed based on FIFO (first in-first out method), corporate actions are considered, and then the calculation is cross-checked and reviewed by another person. Also, depending on the jurisdiction of an FPI, the specific treaty, if any, of that country with India and the applicable tax rate has to be checked,” said another person.
Besides the chartered accountants, the meeting was attended by officials of custodian banks and clearing houses of the stock exchanges. The T+1 settlement was introduced in 2021 in a phased manner and was fully implemented from January 2023. From the end of March this year, the regulator introduced the T+0 settlement on an optional basis.