Sebi proposes same-day fund netting for FPIs to ease liquidity strain

Market regulator Securities and Exchange Board of India (Sebi) on Friday proposed allowing foreign portfolio investors (FPIs) to net funds across cash market transactions executed on the same day, a move aimed at easing liquidity pressure and lowering funding costs, especially during high-volume trading sessions such as index rebalancing days.

 

Under the current framework, FPIs must settle all purchase and sale transactions on a gross basis, even when buy and sell values offset each other. This often leads to higher funding costs and operational inefficiencies. FPIs had sought such a relaxation from the regulator last year. The proposal — part of a broader set of measures by Sebi to ease compliance requirements and simplify FPI onboarding — comes against the backdrop of record outflows from domestic equities last year.

 

 

While custodians net their settlement obligations with clearing corporations, FPIs are required to separately fund purchase trades and deliver securities for sale trades. Sebi noted that this practice frequently leaves FPIs underinvested for at least one day, and results in additional costs due to forex slippage and reliance on short-term credit lines.

 

“Netting of funds in this context shall mean using the proceeds of sale transactions in the cash market on a particular day to fund the purchase transactions in the cash market done by an FPI on the same day, thereby requiring the FPI to fulfil only the net fund obligation,” Sebi said.

 

However, the proposal restricts netting to “outright” transactions — where purchases in one security and sales in another are offset to arrive at a net fund obligation. Netting will not be permitted where an FPI both buys and sells the same security within a settlement cycle. Such trades will continue to be settled on a gross basis, a safeguard Sebi said would help mitigate risks of market manipulation or excessive concentration by large investors.

 

India follows a T+1 settlement cycle in the cash market. T+1 settlement cycle means trades are finalised (securities move to buyer, funds to seller) one business day after the transaction date (T).

 

The regulator acknowledged concerns raised by custodians, clearing corporations, and stock exchanges regarding potential operational risks. These include a higher likelihood of trade rejections if sale transactions fail to confirm, increased settlement risk shifting from FPIs to custodians, and system stress during peak trading periods.

 

Sebi said these risks are adequately mitigated by existing safeguards, including clearing corporations’ default waterfall mechanisms and Core Settlement Guarantee Funds. It also pointed out that custodians already settle their obligations with clearing corporations on a net basis, meaning the proposed change would not materially increase clearing corporation exposure. Custodians, however, would need to upgrade their systems to enable validations based on netted obligations.

 

Importantly, Sebi clarified that securities settlement between FPIs and custodians would continue on a gross basis. As a result, securities transaction tax (STT) and stamp duty will remain unchanged, and continue to be levied on delivery-based transactions.

 

Implementation of the proposal would require amendments by Sebi as well as the Reserve Bank of India (RBI).

 

In recent months, Sebi has rolled out several initiatives to ease FPI onboarding, including the use of digital signatures, single-window platform Swagat-FI, and simplified registration norms for investors focused solely on Indian government bonds.