SEBI said the existing framework often leaves FPIs “underinvested” for at least a day
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HEMANSHI KAMANI
The Securities and Exchange Board of India (SEBI) on Friday proposed permitting netting of funds for cash market transactions by foreign portfolio investors (FPIs), a move aimed at reducing funding costs and improving operational efficiency, particularly during high-volume trading days such as index rebalancing.
Under the proposal, FPIs would be allowed to use sale proceeds from cash market transactions on a given day to fund purchases executed on the same day, thereby meeting only their net fund obligation instead of settling all trades on a gross basis. Public comments have been invited until February 6, 2026.
Currently, FPIs are required to bring in full funds for purchases irrespective of sales on the same day, even though custodians eventually settle their obligations with clearing corporations on a net basis. This results in higher liquidity requirements and funding costs for investors.
SEBI said the existing framework often leaves FPIs “underinvested” for at least a day. “For example, suppose an FPI has purchased stock A worth ₹100 crore and sold stock B worth ₹100 crore. The FPI would still need to make available ₹100 crore towards the purchase,” the regulator said, adding that the amount could otherwise have been adjusted against sale proceeds.
Funding costs
The issue becomes more pronounced during index rebalancing, when FPIs typically see large simultaneous inflows and outflows. “The cost of funding the same increases significantly,” SEBI said, citing feedback from market participants.
However, the proposed netting will be limited. Only “outright” transactions, where an FPI has either a buy or a sell position in a security in a settlement cycle, but not both, will be eligible for fund netting. Trades involving both buy and sell positions in the same security will continue to be settled on a gross basis, effectively excluding intra-day round-tripping from the benefit.
SEBI clarified that if the value of outright sales exceeds outright purchases, the excess sale proceeds cannot be used to fund other buy obligations. Settlement of securities will also continue on a gross basis, and charges such as securities transaction tax and stamp duty will remain unchanged.
Settlement risk
The regulator also acknowledged concerns raised by custodians and clearing corporations, including the risk of higher trade rejections and increased settlement risk shifting to custodians. On this, SEBI said robust safeguards already exist. “Necessary safeguards by way of default waterfall mechanism, Core Settlement Guarantee Fund (Core SGF), etc., have been put in place,” it said, adding that netting could, in fact, reduce the likelihood of fund-related trade rejections.
SEBI said that there would be no change in the settlement process between custodians and clearing corporations, and that custodians would be required to upgrade systems to support the new framework.
The proposal will require amendments to regulatory frameworks issued by SEBI and the Reserve Bank of India. If implemented, the regulator said the move would lower funding costs for FPIs without increasing market risk, as non-outright transactions would continue to be settled on a gross basis to prevent undue market influence.
Published on January 16, 2026
