Imagine a foreign portfolio investor (FPI) buying and selling ₹100 crore of shares in the same day, yet still having to lock up the full ₹100 crore for settlement. SEBI’s new net‑ting proposal promises to end that double‑counting, potentially reshaping funding dynamics for overseas capital flowing into Indian equities.
Why the Current Gross Settlement Burdens FPIs
Under today’s rules, every trade—whether a purchase or a sale—must be settled on a gross basis. Even when an FPI’s buy and sell orders offset each other within a single settlement cycle, the investor must fund the purchase in full before the sale proceeds are received. This creates a temporary liquidity gap, forcing FPIs to arrange extra cash or credit lines for as long as the settlement process takes.
How Netting Can Lower Funding Costs
SEBI’s consultation paper suggests that outright transactions—those where an FPI either buys or sells a security, but not both in the same cycle—be settled on a net basis. In practice, an FPI that purchases ₹100 crore and sells the same amount would only need to fund the net difference, which could be zero. The immediate benefit is a reduction in short‑term financing needs, especially on index‑rebalancing days when large, opposite‑direction trades are common.
Index Rebalancing: The Sweet Spot for Savings
When an index adds or drops constituents, FPIs often execute sizable buy and sell orders to mirror the new composition. Gross settlement forces them to allocate fresh capital for each side of the trade, inflating costs. Netting would allow the proceeds from the sell leg to offset the purchase leg, freeing up cash that can be redeployed elsewhere or reduce borrowing costs.
Potential Risks and Safeguards
- Dependency on Accurate Trade Confirmation: A failed sell confirmation could jeopardize the corresponding purchase, requiring brokers to step in.
- Systemic Load on Heavy Trading Days: Increased reliance on netting may stress settlement infrastructure, though SEBI notes existing safeguards can handle failures.
- Custodian Upgrades: Custodians must enhance their platforms to support netted settlement, a transition that could entail short‑term operational adjustments.
SEBI argues that netting actually lowers systemic risk by reducing the total amount of funds moving through the system, thereby limiting the exposure of any single participant.
What This Means for the Indian Market
By aligning FPI settlement practices with those already available at the clearing‑member level, India moves closer to global best practices. Lower funding costs could make Indian equities more attractive to stable foreign capital, potentially offsetting recent outflows. However, experts caution that efficiency alone won’t make the market “immensely lucrative” without broader reforms.
Stakeholders have until 6 February to comment on the proposal, making this a pivotal moment for regulators, custodians, and investors alike.
Remember, this analysis reflects current thinking, not a guaranteed outcome. Conduct your own research before making investment decisions.