SEBI eases FPI settlement norms, allows netting of funds in cash market to reduce costs, improve efficiency

With an aim to increase market efficiency and reduce transaction costs for foreign portfolio investors (FPIs), the Securities and Exchange Board of India (SEBI) has introduced a framework allowing net settlement of funds for foreign investors in the cash market.

Currently, FPIs must settle trades on a gross basis at the custodian level, even though the custodians themselves fulfill their obligations with the clearing corporations. This structure has long been flagged by market participants for creating high liquidity needs, forex-related costs and operational inefficiencies, particularly during periods such as index rebalancing.

Addressing these concerns, SEBI has allowed netting of funds for “normal transactions” – defined as transactions involving only buying or only selling within a settlement cycle. This means that FPIs can offset buy and sell positions in such transactions to arrive at a net payable or receivable, thereby reducing funding requirements.

However, transactions involving buy-sell positions in the same security during the settlement cycle—known as non-right transactions—will continue to be settled on an aggregate basis. Further, excess sale proceeds from outright trades cannot be used to offset liabilities arising from such non-routine transactions, ensuring a degree of discretion in the framework.

Importantly, while fund settlement is netted, securities settlement between FPIs and custodians will continue on a gross basis, and statutory levies such as Securities Transaction Tax (STT) and stamp duty will remain in place.

The new framework is expected to reduce funding costs, improve capital efficiency and streamline settlement operations for foreign investors – making Indian markets more attractive for global capital flows.

SEBI has directed custodians and other stakeholders to update their systems accordingly, with the framework to be implemented by December 31, 2026.

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The move is part of the regulator’s broader effort to modernize market infrastructure while protecting investors’ interests and ensuring smooth functioning of the market.

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