Description

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

Summary

SEBI has introduced a framework allowing Foreign Portfolio Investors (FPIs) to net settle funds for outright transactions in the cash market. Previously, FPIs were required to settle obligations on a gross basis at the custodian level. The new mechanism permits netting of funds for transactions where an FPI has either only purchases or only sales in a given security within a settlement cycle, thereby reducing liquidity requirements, forex slippage, and funding costs. Implementation is required by December 31, 2026.

Key Points

  • Net settlement of funds is now permitted for outright transactions by FPIs — defined as either a purchase or a sale (but not both) in a security within a single settlement cycle.
  • Transactions in securities where an FPI has both purchases and sales in the same settlement cycle are excluded from netting and continue to be settled on a gross basis.
  • If outright sale value is less than outright purchase value, the residual amount plus non-outright purchase obligations must be funded by the FPI.
  • If outright sale value exceeds outright purchase value, the excess cannot be adjusted against non-outright purchase obligations.
  • Settlement of securities (as opposed to funds) continues on a gross basis between FPI and custodian.
  • STT and stamp duty continue to be charged on a delivery basis — unchanged.
  • The Custodians and Designated Depository Participants Standards Setting Forum (CDSSF) will formulate implementation standards in consultation with relevant stakeholders.

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 the extent specified in this circular.
  • The existing rule prohibiting institutional investors from day trading (intra-day square-off) remains in force.
  • Custodians continue to net settle deliveries with Clearing Corporations — only the fund settlement layer for FPIs is being modified.

Compliance Requirements

  • Custodians: Must implement system changes to support net fund settlement for FPI outright transactions; participate in CDSSF standard-setting process.
  • FPIs: Must update internal systems and processes to align with the new netting mechanism.
  • Clearing Corporations: Must adapt settlement infrastructure to handle the new fund obligation calculation.
  • Stock Exchanges: Must communicate changes to registered stock brokers and ensure readiness.
  • CDSSF: Responsible for formulating and publishing implementation standards after stakeholder consultation.

Important Dates

  • Circular Date: April 24, 2026
  • Implementation Deadline: On or before December 31, 2026 — all entities must have necessary system changes in place.

Impact Assessment

This change has a high operational and financial impact on FPIs and their custodians. Key benefits include:

  • Reduced liquidity requirements: FPIs no longer need to arrange gross funding for offsetting outright buy/sell positions across different securities.
  • Lower forex slippage: Reduced need to convert foreign currency for gross obligations, particularly significant during large index rebalancing events (e.g., MSCI, FTSE rebalancing days).
  • Operational efficiency: Simplifies fund movement between FPI accounts and custodians for net outright positions.
  • Limitation: Non-outright transactions (where an FPI trades both ways in the same security within a settlement cycle) remain on gross basis, limiting the benefit for active traders but protecting market integrity.
  • The change aligns India’s FPI settlement practices closer to global norms, potentially making Indian markets more attractive to foreign institutional capital.

Impact Justification

This circular significantly changes the settlement framework for FPIs, one of the largest investor classes in Indian markets. Allowing net fund settlement for outright transactions reduces liquidity drag, forex slippage, and operational costs — particularly impactful during index rebalancing events. All custodians, clearing corporations, stock exchanges, and stock brokers must implement system changes by December 31, 2026.