A set of announcements over the past few days have fuelled hopes of some sort of policy convergence in the Indian financial sector. First, finance minister Nirmala Sitharaman announced that the government would soon unveil rules on allowing Indian firms to list directly on overseas exchanges and at the International Gift City exchange in Gujarat. Next, the securities market regulator Sebi said it was working on introducing a T+zero settlement cycle, meaning instantaneous settlement of stock market transactions. There was also a media report that the government and the RBI are working on an alternative to the global payment messaging system Swift.
The proposal to allow Indian companies to directly list overseas without a public offering in India has been in the works since the glory days of the Indian software services industry, but the argument for it remains valid even now. It’s thought that Indian firms will fetch better valuations in overseas markets, thanks to a broader set of investors and greater pools of capital at lower costs.
This time around, Indian unicorns are leading the charge for this change. These companies are in the midst of a funding winter with venture-capital and private-equity funding scarce, and allowing them to list overseas could benefit them greatly. An expert committee formed by Sebi had recommended this four years ago.
The plan to move towards a T+zero trade-settlement is truly ambitious, and a reflection of the strides made by India’s financial market. India is now one of the few countries with a stock market that operates on the T+1 system, in which transactions are settled within 24 hours. Just over two decades ago, settlement took place once a fortnight and was patchy. But successive governments worked with the regulator to bring forward the settlement cycle from T+3 to T+2 and now T+1. A shift to instantaneous settlement would further boost liquidity and volumes, and reduce risks.
India has also been discussing an alternative to the Swift payment system for the past five years, but the economic sanctions imposed on Russia after it invaded Ukraine have made it a pressing issue for policymakers. India has made a start by signing bilateral agreements with a few Asian countries to carry out transactions in rupees, with the long-term goal of internationalising the currency. In a recent report, the RBI termed its recent moves as a process and not an event, implying that it is more of a signalling effort now.
With a share of around 2% of global merchandise trade, invoicing exports or imports in rupees will take considerable time. As with China, which started to internationalise its currency well over a decade ago, capital controls and the exchange rate will be key factors.
Strategically, the move by the government and the RBI to push for a central bank digital currency or CBDC should also be of help down the line in bilateral payments. But India’s share in the global trade pie needs to grow significantly for that to happen, and for multiple countries to accept the Indian rupee as a credible alternative to the US dollar. As Sebi works on the next set of changes, it also needs to demonstrate that it is on top of its game on checking and preventing market abuse.
