SEBI Mandates Net Settlement for Foreign Portfolio Investors by December Rollout

India's Markets Regulator Sebi Announces Net Settlement for Foreign Portfolio Investors

India's markets regulator, the Securities and Exchange Board of India (Sebi), has issued a detailed framework formalizing the decision to permit net settlement of funds for outright transactions by foreign portfolio investors (FPIs) by 31 December. The move aims to improve operational efficiency and lower funding costs for foreign investors.

Under the existing regime, FPIs are required to settle each leg of a trade separately, even if their net position across buy and sell transactions is zero. The new norms have been mandated to come into effect by 31 December, with the regulator asking the Custodians and Designated Depository Participants Standards Setting Forum (CDSSF) to come up with implementation standards after consulting relevant stakeholders.

The netting of FPI trades is expected to make India a more attractive market for FPIs in the long run, as most developed markets net FPI transactions. For instance, in the US, trades are netted for operational efficiency, while similar mechanisms are used across the European Union, and markets like the UK and Singapore.

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The gross settlement of transactions by FPIs has long been flagged by market participants as capital-intensive and inefficient. For example, an investor buying and selling ₹100 crore worth of shares in a single session currently needs to fund the purchase in full while delivering the sale proceeds independently, despite there being no net cash outflow. The new framework allows such obligations to be offset, eliminating the need to move large sums purely for settlement purposes.

However, net settlement of transactions is permitted only for outright transactions, which involve buying and/or selling different securities within a settlement cycle. Transactions in securities having both purchase and sale transactions will be settled on a gross basis.

The move comes despite some custodians flagging operational inefficiencies in implementing such changes to transactions during a period of volatility. Settlement of securities will continue to take place on a gross basis between FPIs and custodians, while Securities Transaction Tax (STT) and stamp duty will remain applicable on a delivery basis, as per the Sebi circular.

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