Sebi Eases FPI Settlement Norms, Allows Netting of Funds in Cash Market to Cut Costs, Improve Efficiency

Why It Matters

Netting cash for outright trades cuts funding costs and liquidity needs for FPIs, making Indian equities more attractive to global capital. The change enhances market efficiency without compromising prudential safeguards.

Key Takeaways

• FPIs can net cash for outright trades, lowering funding needs
• Gross settlement remains for securities and non‑outright transactions
• Implementation deadline set for 31 Dec 2026 across custodians
• Reduced liquidity requirements expected to attract more foreign capital
• STT and stamp duty rates unchanged despite net‑settlement shift

Pulse Analysis

India’s equity markets have long required foreign portfolio investors to settle each trade on a gross basis at the custodian level, a practice that inflates liquidity demands and adds foreign‑exchange costs. This friction becomes especially pronounced during high‑volume events like index rebalancing, where multiple buy and sell orders for the same security must be funded separately. By contrast, many mature markets allow cash netting, streamlining the settlement pipeline and freeing capital for other investments. Sebi’s move aligns India with global best practices, reducing operational drag for overseas funds.

The new net‑settlement framework applies specifically to "outright" transactions—those involving only purchases or only sales of a security within a settlement cycle. FPIs can now offset these positions, arriving at a single net cash amount, while the underlying securities continue to be settled grossly to preserve transparency. Non‑outright trades, which mix buys and sells, remain on a gross basis, and excess proceeds from outright sales cannot be used to meet other obligations, maintaining a prudential buffer. Custodians must upgrade their systems to support the dual‑track approach, a task Sebi has mandated be completed by the end of 2026.

The anticipated impact is multifold: lower funding costs translate into tighter bid‑ask spreads, while reduced liquidity requirements free up capital that can be redeployed into additional Indian assets. Streamlined operations also lower settlement risk, enhancing confidence among foreign investors. With statutory levies unchanged, the net benefit is largely cost‑saving. As global investors seek efficient entry points into high‑growth markets, this regulatory tweak could boost foreign inflows, positioning India more competitively against regional peers such as Singapore and Hong Kong.