Sebi proposes fund netting for FPIs to reduce funding burden in cash market

The Securities and Exchange Board of India (Sebi) is moving closer to a major reform in the way foreign portfolio investors (FPIs) settle their trades, proposing changes that could significantly reduce funding costs and improve efficiency in the cash market. In a consultation paper released on Friday, the regulator outlined a plan to allow FPIs to offset their purchase and sale obligations within a trading day, replacing the current system that requires settlements on a gross basis.

At present, FPIs must independently fund every buy order and deliver securities for every sell order, even when both transactions occur on the same day and are of equal value. This means an investor who buys and sells shares worth Rs 100 crore each must still arrange Rs 100 crore in funding for the purchase leg, despite having matching sale proceeds. 

Market participants say this often leads to unnecessary liquidity strain, temporary underinvestment and additional costs linked to short-term borrowing and foreign exchange movements.

Sebi acknowledged these concerns, noting that custodians already settle their positions with clearing corporations on a net basis, while FPIs continue to bear the burden of gross settlement. 

What will change

The proposed change would allow FPIs to use sale proceeds from the same day to meet their purchase obligations, leaving them responsible only for the net amount. According to the regulator, this will help free up capital, particularly on heavy trading days such as index rebalancing, when large buy and sell orders are executed simultaneously.

However, the relaxation will not apply across the board. Sebi has proposed that netting be permitted only for “outright” transactions—where an investor buys one security and sells another in the same settlement cycle. If an FPI both buys and sells the same stock on the same day, those trades will continue to be settled separately on a gross basis. The regulator said this distinction is essential to prevent excessive leverage, concentration risks and potential market manipulation.

Sebi chairman Tuhin Kanta Pandey had earlier indicated that recommendations on settlement reform were nearing completion, and the consultation paper signals that the regulator is now seeking feedback before finalising the framework.

The move comes at a time when India has witnessed significant foreign outflows from equities, prompting regulators to look for ways to make market participation smoother and more cost-effective for overseas investors.

Sebi said the risks from fund netting are manageable under existing safeguards such as clearing corporations’ default waterfall systems and Core Settlement Guarantee Funds. Since custodians already settle with clearing corporations on a net basis, the regulator believes the change will not significantly increase systemic exposure, though custodians will need to upgrade systems to validate net obligations. Sebi also clarified that securities settlement between FPIs and custodians will continue on a gross basis, meaning levies like STT and stamp duty will remain unchanged. Implementing the proposal will require regulatory changes by Sebi and the RBI.

Alongside settlement reform, Sebi has already introduced several measures to simplify FPI onboarding, including digital signatures, the Swagat-FI single-window clearance system and streamlined registration for investors focused on government bonds.