The case for drowning the float in the T+0 era
Mint Explainer: What is T+0 settlement and how will it benefit investors? India’s financial market has evolved from ambiguous settlement dates to highly efficient T+0 (same-day) settlements. However, this has not been accompanied by a reduction in the float.
From the pre-Clearing Corporation era, which saw significant float due to DVP/RVP settlements, to partial standardisation with the emergence of the Clearing Corporation and STP Gate, the float has remained present at varying degrees despite advances in the market, including the RBI's emphasis on custodians recognising trade confirmation risks. On the buy side, this has moved in tandem with the the shortening of the trade cycle but it has unfortunately persisted on the sell side.
Sell-side float is particularly problematic because of the intricate web of tax liabilities and regulations that dictate the flow of funds from a foreign investor's account. Key among these is the requirement to appoint a tax representative, a complex necessity given India's intricate tax laws and the enduring liability even after an investor exits the market.
Also read: Same-day settlement off to a tepid start Additionally, tax regulations necessitate the deduction of tax before any remittance, which requires a handoff between custodians and tax consultants. This is the primary reason why the sell-side float has remained stubbornly immune to efficiency improvements.
In the developing T+0 cycle, the tax liability crystallisation is further delayed, occurring only after the sale transaction contract note is issued, effectively sustaining the sell-side float. It’s important to note that there are other developing markets in Asia (such as Indonesia) where the onus of tax computation lies on the
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