SEBI's Proposal on Foreign Portfolio Investors (FPIs) Netting

The Securities and Exchange Board of India (SEBI) has proposed allowing Foreign Portfolio Investors (FPIs) to net funds across cash market transactions executed on the same day. This move aims to ease liquidity pressure and lower funding costs, especially during high-volume trading sessions.

Current Framework

• FPIs must settle all purchase and sale transactions on a gross basis, even if buy and sell values offset each other.
• This leads to higher funding costs and operational inefficiencies.

Proposed Changes

• Allow FPIs to use proceeds from sales to fund purchases on the same day, fulfilling only the net fund obligation.
• Restricted to "outright" transactions across different securities.
• Netting will not apply where FPIs buy and sell the same security within a settlement cycle.

Operational and Settlement Considerations

• India follows a T+1 settlement cycle, where trades are finalized one business day after the transaction date.
• Existing safeguards like clearing corporations’ default waterfall mechanisms will mitigate operational risks.
• Custodians would need system upgrades to handle netted obligations.

Continuing Practices

• Securities settlement between FPIs and custodians will remain on a gross basis.
• Securities transaction tax (STT) and stamp duty will stay unchanged and be levied on delivery-based transactions.

Implementation and Additional Initiatives

• Implementation requires amendments by SEBI and the Reserve Bank of India (RBI).
• SEBI has been easing FPI onboarding with digital signatures, the Swagat-FI platform, and simplified registration norms for investors.