In a consultation paper released on January 16, Sebi said the current settlement framework requires FPIs to settle all cash market trades on a gross basis at the custodian level, even if their buy and sell positions offset each other on the same day.
The paper comes in the wake of heavy selling from foreign investors since the last one year. FIIs have sold $21 billion of equities from the beginning of 2025.
While custodians eventually settle with clearing corporations on a net basis, FPIs are required to bring in full funds for purchases and deliver securities for sales separately, leading to higher temporary liquidity requirements.
Sebi noted that this structure often leaves FPIs underinvested for at least one day and exposes them to additional costs such as forex conversion slippage and short-term funding expenses. These issues become more pronounced during index reshuffling days, when FPIs execute large buy and sell trades simultaneously.
Under the proposed framework, Sebi has suggested permitting “netting of funds” for outright buy and outright sell transactions carried out by an FPI in the cash market on the same settlement day. This would allow sale proceeds to be adjusted against purchase obligations, requiring FPIs to fund only the net cash amount.
However, trades where an investor both buys and sells the same security within the same settlement cycle will continue to be settled on a gross basis, in line with existing rules.Sebi said discussions with custodians, clearing corporations and stock exchanges highlighted potential risks, including higher chances of trade rejection and increased settlement risk for custodians. Market participants also flagged concerns around system readiness during peak trading days and the absence of margin collection for FPI cash market trades.
To address these risks, Sebi pointed out that India’s clearing system already has strong safeguards such as default waterfall mechanisms and core settlement guarantee funds.
The regulator also said custodians would be required to upgrade systems to handle the proposed netting process, while settlement between custodians and clearing corporations would continue on a net basis, as is currently the case.
Importantly, Sebi clarified that securities settlement will remain on a gross delivery basis and that securities transaction tax and stamp duty will continue to apply as per existing norms. The regulator said the proposed change is designed to reduce funding stress without increasing systemic risk or enabling excessive intra-day trading by FPIs.
The regulator has invited public comments on the proposal and the suggested risk mitigants, with feedback open until February 6 before a final decision is taken.
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