Sebi suggests same-day fund netting for FPIs to boost operational efficiency and cut costs

New Delhi: Markets regulator Sebi on Friday proposed allowing Foreign Portfolio Investors (FPIs) to net funds for same-day cash market trades instead of settling each transaction on a gross basis, a move aimed at improving operational efficiency and lowering funding costs, particularly during index rebalancing days.

At present, FPIs are required to settle equity cash market trades on a gross basis, funding each purchase independently of sale transactions, even when both occur on the same day. This framework results in additional funding costs for at least one extra day and can also expose FPIs to forex slippage while buying and selling currency to meet settlement obligations.

To address these issues, Sebi reviewed the existing settlement mechanism and proposed permitting “netting of funds” for FPIs’ cash market transactions, according to a consultation paper. Netting would allow FPIs to use sale proceeds generated on a given day to fund purchase transactions executed the same day, leaving them with only a net fund obligation.

Under the proposal, transactions involving only outright purchases or outright sales in a settlement cycle would be netted to determine the net fund requirement. Outright transactions are defined as those where an FPI either buys or sells a particular security, but does not do both, within the same settlement cycle.

However, transactions in securities where an FPI has both buy and sell positions in the same settlement cycle would be excluded from netting. Such non-outright transactions, including intra-day buy and sell trades in the same security, would continue to be settled on a gross basis, as per the existing system.

Sebi further explained that if the value of outright sales does not exceed the value of outright purchases, the residual amount, along with non-outright buy obligations, would need to be funded by the FPI. If outright sales exceed outright purchases, the excess sale value would not be adjusted against non-outright buy obligations.

The regulator clarified that settlement of securities between FPIs and custodians would continue on a gross basis. Accordingly, Securities Transaction Tax (STT) and stamp duty would remain applicable on a delivery basis.

Sebi said the proposal would help reduce funding costs for FPIs, especially during index rebalancing, while continuing gross settlement for non-outright transactions would mitigate the risk of market disruption by large investors. Public comments on the proposal have been invited until February 6.