Description

SEBI introduces a net settlement framework for outright transactions by Foreign Portfolio Investors (FPIs) in the cash market, reducing liquidity requirements and operational costs, effective by December 31, 2026.

Summary

SEBI has introduced a framework permitting net settlement of funds for outright transactions undertaken by Foreign Portfolio Investors (FPIs) in the cash market. Previously, FPI transactions were grossed at the custodian level and settled on a gross basis, leading to increased liquidity requirements and forex slippage costs. This circular modifies SEBI’s Master Circular for Stock Exchanges and Clearing Corporations (December 30, 2024) and must be implemented by December 31, 2026.

Key Points

  • FPIs were previously required to settle fund obligations on a gross basis at the custodian level, even though custodians net-settle with Clearing Corporations.
  • Net settlement is now permitted exclusively for outright transactions — defined as either a pure purchase or a pure sale in a security within a settlement cycle, but not both.
  • Securities in which an FPI has both purchase and sale transactions in the same settlement cycle are excluded from netting and continue to be settled on a gross basis.
  • If the value of outright sales is less than outright purchases, the residual amount (along with non-outright purchase obligations) must be funded by the FPI.
  • Excess outright sale value cannot be offset against non-outright purchase obligations.
  • Settlement of securities continues on a gross basis between FPI and custodian.
  • Securities Transaction Tax (STT) and stamp duty continue to be charged on a delivery basis.
  • Implementation standards will be formulated by the Custodians and Designated Depository Participants Standards Setting Forum (CDSSF) after stakeholder consultation.

Regulatory Changes

  • Para 4 of Annexure 3 of Chapter 1 (Trading) of SEBI’s Master Circular for Stock Exchanges and Clearing Corporations dated December 30, 2024 is modified to permit net fund settlement for FPI outright transactions.
  • The restriction on day trading (intra-day squaring off) for institutional investors remains unchanged.
  • Issued under Section 11(1) of the SEBI Act, 1992, read with Regulation 44 of SEBI (Foreign Portfolio Investors) Regulations, 2019.

Compliance Requirements

  • Custodians: Must update systems to implement net fund settlement for FPI outright transactions; participate in CDSSF standard-setting process.
  • Foreign Portfolio Investors (FPIs): Must update operational systems to align with the new net settlement framework.
  • Clearing Corporations: Must support and accommodate the revised settlement mechanism.
  • Stock Exchanges: Must communicate the framework to all registered stock brokers.
  • CDSSF: Responsible for formulating implementation standards in consultation with stakeholders.

Important Dates

  • Circular Date: April 24, 2026
  • Implementation Deadline: December 31, 2026 (all entities must implement the required system changes by this date)

Impact Assessment

This circular has significant operational and financial impact for institutional market participants:

  • Liquidity Relief: FPIs will require less upfront liquidity on days of high trading activity (e.g., index rebalancing), as net fund obligations will be lower than gross obligations.
  • Reduced Forex Costs: Lower gross funding requirements mean reduced forex conversion needs, cutting slippage costs for foreign investors.
  • Operational Efficiency: Simplifies the funding process for FPIs and custodians on high-volume days.
  • Limited Scope: Netting applies only to outright transactions; mixed (buy + sell in same security, same cycle) transactions remain gross-settled, limiting the benefit in arbitrage or hedging strategies.
  • No Change to Securities Settlement: Securities delivery remains gross, maintaining existing DvP integrity and STT/stamp duty obligations.
  • Broader Market Impact: May encourage greater FPI participation and reduce friction during index rebalancing events, potentially improving market liquidity.

Impact Justification

This circular introduces a structural change to how FPIs settle fund obligations, shifting from gross to net settlement for outright transactions. It affects all FPIs, custodians, clearing corporations, and stock exchanges, with significant implications for liquidity management and forex costs at an institutional level.