Foreign portfolio investors (FPIs) have long wrestled with a cash‑settlement system that forces them to fund every trade on a gross basis, even when buys and sells offset each other on the same day.
How the Existing Settlement Process Works
Under the current framework, custodians settle with clearing corporations on a net basis, but FPIs must bring full cash for purchases and deliver securities for sales separately. This creates a temporary liquidity gap of at least one settlement day.
- Full cash outflow for purchases, regardless of simultaneous sales.
- Separate delivery of securities for sales, increasing operational steps.
- Additional costs from foreign‑exchange conversion slippage and short‑term funding.
Why SEBI Is Proposing Netting of Cash
Recent market dynamics—most notably heavy foreign selling of $21 billion of equities since early 2025 and the intense activity around index rebalancing—have highlighted the strain on FPIs. By allowing net cash settlement, SEBI hopes to:
- Reduce funding requirements and free up capital for other investments.
- Lower forex conversion costs and short‑term borrowing expenses.
- Streamline operational workflows on peak trading days.
Details of the Proposed Netting Framework
The consultation paper released on 16 January suggests that FPIs can offset sale proceeds against purchase obligations for outright buy and sell transactions executed on the same settlement day. The key points are:
- Net cash settlement: Only the net amount (buy – sell) needs to be funded.
- Gross settlement for same‑security intraday trades: If an investor buys and sells the identical security within the same cycle, the gross rule remains.
- Retention of gross securities delivery: Physical transfer of shares continues on a gross basis, preserving existing tax and stamp duty treatments.
Risk Mitigation and System Readiness
Stakeholders—including custodians, clearing corporations, and exchanges—raised concerns about potential trade rejections and heightened settlement risk. SEBI counters these worries by pointing to:
- India’s robust default waterfall mechanisms and a core settlement guarantee fund.
- Mandatory system upgrades for custodians to handle netting calculations.
- Continued net settlement between custodians and clearing corporations, as already practiced.
Potential Impact on Foreign Investors and the Indian Market
Should the proposal be adopted, FPIs could experience a measurable reduction in funding stress, especially during index reshuffles when large, simultaneous buy‑sell orders are common. The expected benefits include:
- Improved cash efficiency, enabling more strategic positioning.
- Lower overall transaction costs, which may make Indian equities more attractive to foreign capital.
- Enhanced market stability by reducing the need for short‑term borrowing.
Next Steps and Investor Takeaway
SEBI has opened the floor for public comments until 6 February. Market participants are encouraged to weigh in on the practicalities of implementation and any additional safeguards they deem necessary. For retail and institutional investors alike, the proposal signals a regulatory tilt toward easing operational friction for foreign money flows.
Remember, this analysis reflects a perspective, not a prediction. Conduct your own research and consider your risk tolerance before making investment decisions.