SEBI Approves Fund Netting for Foreign Portfolio Investors in Cash Market Trades

SEBI Approves Netting for FPIs in Same-Day Cash Market Transactions

Market Update

The Securities and Exchange Board of India (SEBI) has approved the introduction of netting for Foreign Portfolio Investors (FPIs) in same-day cash market transactions. This move aims to reduce liquidity pressure and funding costs, particularly during high-volume trading events such as index rebalancing.

Key Benefits

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The proposal will allow FPIs to net funds from same-day cash market transactions, enabling them to use sale proceeds to meet purchase obligations. This will reduce the need for FPIs to fund the full value of purchase transactions, even if they have offsetting sales on the same day. For instance, if an FPI buys stocks worth Rs 2,000 and sells stocks worth Rs 2,000 on the same day, the netting mechanism will reduce funding needs, resulting in a lower fund pay-in of Rs 1,000.

Implementation Details

The proposal will be implemented before December 31, 2026. Netting will be allowed only for outright transactions, 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.

Mitigating Risks

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SEBI has clarified that existing safeguards, such as the default waterfall mechanism and the Core Settlement Guarantee Fund (SGF), will mitigate potential risks associated with netting. These risks include higher trade rejections due to failed sale transactions and a possible shift in settlement risk from FPIs to custodians.

Settlement Details

Securities will continue to be settled on a gross basis between FPIs and custodians. Securities Transaction Tax and stamp duty will remain delivery-based. The proposal is expected to reduce liquidity pressure and funding costs for FPIs, particularly during high-volume trading events.