Big Sebi move: FPIs get net settlement nod, AIF rules relaxed

The Securities and Exchange Board of India (Sebi) on Monday approved several proposals as it looks to further improve the ease of doing business. The proposals approved at the capital market regulator’s board meeting included permitting foreign portfolio investors’ net settlement of funds for transactions and providing alternative investment funds (AIF) the flexibility to wind up schemes and surrender registration, among others.

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Over the past 12-15 months, FPIs have been selling massively from India’s equity markets. The market regulator has now approved a proposal permitting net settlement of funds, a move that will reduce their costs and improve operational efficiency. It will be implemented on or before December 31, 2026.

“Currently, FPIs settle their transactions with custodians on a gross basis, which results in additional costs for FPIs; including funding costs and foreign exchange slippages. Recognising, these concerns, and with a view to enhancing operational efficiency and reducing the cost of funding for FPIs, it has been decided to permit net settlement of funds for outright transactions done by FPIs in the cash market,” noted Tuhin Kanta Pandey, chairman of Sebi.

These transactions would have to be either purchase or sale in a security in a settlement cycle, but there can't be both buy and sell in the same security.

Essentially, if an FPI buys a stock worth Rs 100 crore and sells another stock worth Rs 100 crore, under current measures, the FPI needs to make available Rs 100 crore to buy the stock and deliver the other stock worth Rs 100 crore. With netting now permitted, the Rs 100 crore payment for pay-in won't be required, and the pay-in obligation will be adjusted against the proceeds from the sale of the other stock.

Sebi has also approved the introduction of a framework for tagging certain AIFs as inoperative funds with lighter compliance requirements till surrender of their registration certificate.

Under existing regulations, AIFs have to distribute liquidation proceeds to investors within the permissible fund life and achieve a nil bank account balance before surrendering their registration certificate. According to Sebi, certain AIFs were observed to be retaining funds beyond this period, due to pending or anticipated tax or litigation demands or residual operational expenses and were unable to satisfy this requirement.

Therefore, even when there was no active fund management, the AIF had to continue to hold the registration and comply with the attendant requirements.

Retention of proceeds by AIFs beyond oermissible fund life shall be permitted upon satisfying one of the conditions, which include, demonstrable receipt of litigation notice or tax/ regulatory demand; consent of at least 75 per cent of investors by value, for satisfying anticipated liabilities from litigation or tax demand; or substantiation of amounts retained for operational expenses through invoices or prior-year comparables, subject to to a maximum retention for three years from end of permissible fund life.

AIFs that intend to surrender their registration and have one or more such scheme will be tagged inoperative and their compliance requirement will be lesser, compared with other AIFs, Sebi stated.