SEBI allows fund netting for FPI cash market trades to cut funding costs

Under the current framework, FPIs are required to settle equity cash market trades on a gross basis, meaning they must fund the full value of purchase transactions even if they have offsetting sales on the same day. Netting will allow FPIs to use same-day sale proceeds to meet purchase obligations, requiring them to fund only the net amount payable for the settlement day.

• SEBI allows FPIs to net funds from same-day cash market trades
• Netting reduces FPIs' funding needs and liquidity pressure
• Only outright buy or sell transactions qualify for netting

Did our AI summary help?

Market regulator Securities and Exchange Board of India’s (SEBI’s) board has allowed Foreign Portfolio Investors (FPIs) to net funds from same-day cash market transactions, a move aimed at reducing liquidity pressure and funding costs, particularly during high-volume trading events such as index rebalancing. The proposal will be implemented before December 31, 2026.

This was reported exclusively by Moneycontrol on March 19.

Under the current framework, FPIs are required to settle equity cash market trades on a gross basis, meaning they must fund the full value of purchase transactions even if they have offsetting sales on the same day. Netting will allow FPIs to use same-day sale proceeds to meet purchase obligations, requiring them to fund only the net amount payable for the settlement day.

For instance, if an FPI buys stocks A and B worth Rs 1,000 each and sells stocks B and C worth Rs 2,000 each on the same day, the current system requires full payment of Rs 2,000 for purchases despite equivalent sale proceeds. Under the netting mechanism, the outright buy (A) and outright sell (C) will be netted, reducing funding needs. Stock B, involving both buy and sell trades, will be excluded from netting and continue on a gross basis. As a result, the FPI’s fund pay-in reduces from Rs 2,000 to Rs 1,000, while securities settlement remains unchanged.

SEBI had received feedback from market participants that the existing gross settlement requirement leads to inefficiencies, higher funding costs, and foreign exchange slippage. These challenges intensify during index rebalancing days, when FPIs simultaneously exit and enter multiple index constituents.

While custodians settle their obligations on a net basis with clearing corporations, FPIs themselves cannot use sale proceeds to fund purchases, resulting in higher temporary liquidity requirements.

However, the scope of netting will be limited. SEBI said netting will be allowed only for outright transactions—securities where an FPI has either a buy or a sell position in a settlement cycle, but not both. Securities involving both buy and sell transactions on the same day will continue to be settled on a gross basis.

During deliberations with custodians, clearing corporations, and stock exchanges, market participants flagged potential risks, including higher trade rejections if sale transactions fail to confirm and a possible shift in settlement risk from FPIs to custodians due to timing gaps between pay-in and pay-out. Concerns were also raised about system stress during peak trading days. SEBI said these risks are mitigated by existing safeguards such as the default waterfall mechanism and the Core Settlement Guarantee Fund (SGF).

The regulator has also clarified that securities will continue to be settled on a gross basis between FPIs and custodians, and that Securities Transaction Tax and stamp duty will remain delivery-based.