New Delhi, April 24: Markets regulator Sebi on Friday allowed Foreign Portfolio Investors (FPIs) to net funds for same-day cash market trades, instead of settling each trade individually, a move aimed at enhancing operational efficiency and reducing the cost of funding for them, especially on index rebalancing days.
Framework to be implemented by 2026
The framework will be implemented on or before December 31, 2026, the Securities and Exchange Board of India (Sebi) said in its circular.
Currently, FPIs settle their transactions with custodians on a gross basis, resulting in additional costs for FPIs, including funding costs and foreign exchange slippages.
Moreover, market participants submitted representations highlighting that the gross settlement of transactions results in additional liquidity requirements, increased funding costs due to forex slippage and operational inefficiency for FPIs, particularly during index rebalancing days.
Objective to reduce costs and improve efficiency
"Accordingly, with an objective to enhance operational efficiency and reduce cost of funding for FPIs, it is decided to permit net settlement of funds for outright transactions undertaken by FPIs in cash market. For the purpose of this circular, 'outright transactions' shall mean either a purchase or a sale transaction, but not both, in a security in a settlement cycle undertaken by an FPI," Sebi said.
Netting of funds refers to using the proceeds of sale transactions in the cash market on a particular day to fund the purchase transactions done by an FPI on the same day, thereby requiring the FPI to fulfil only the net fund obligation.
How the net settlement mechanism will work
Under the framework, FPI transactions in securities with only outright sales or outright purchases would be net settled to determine the net fund obligation for such outright transactions.
Transactions in securities that have both purchase and sale transactions within a settlement cycle shall be excluded from netting. Such non-outright transactions will continue to be settled by FPI as per the current procedure — on a gross basis.
In case the value of outright sale is less than the value of outright purchase, the residual amount along with non-outright purchase obligations will be funded by the FPI.
However, if the value of outright sale exceeds the value of outright purchase, the excess outright sale shall not be adjusted towards non-outright purchase obligations.
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Sebi clarified that settlement of securities would continue to be carried out on a gross basis between the FPI and the custodian. Also, the Securities Transaction Tax (STT) and stamp duty will continue to be levied on a delivery basis, as applicable.
Background of the proposal
Last month, the board of Sebi approved a proposal in this regard.
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