- SEBI proposes allowing fund netting for Foreign Portfolio Investors in cash markets.
- Netting mechanism aims to reduce liquidity pressures and lower short-term funding costs.
- Proposal seeks to enhance settlement efficiency and attract more foreign investment.
The Securities and Exchange Board of India (SEBI) has proposed a significant change to the way Foreign Portfolio Investors (FPIs) settle their cash-market transactions by allowing netting of funds for same-day trades, which will help foreign investors in Indian markets by improving their operational efficiency and decreasing their funding costs.
The current system requires FPIs to execute their buy and sell transactions through gross settlement because they must treat each transaction as a separate event even when their purchases and sales occur on the same day.
The proposed netting framework would let FPIs use the proceeds from sales executed on the same settlement cycle to fund purchase obligations, leading to a single net cash obligation rather than multiple gross funding requirements.
The new rules will help traders during times of heavy trading which occur when major stock market indices undergo rebalancing or when investors trade large quantities of securities.
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The SEBI consultation paper states that only complete transactions which consist of either full purchases or full sales will be used to calculate net funding obligations while FPI trades that include both buying and selling during a trading cycle will not be included in netting calculations.
The securities settlement process will maintain its current gross delivery method while all relevant taxes and duties including securities transaction tax and stamp duty will continue to apply.
The regulator has requested public feedback on the proposed rule, which aims to improve market operations and attract foreign investment to India.
SEBI officials conducted discussions with custodians and clearing corporations and exchanges to assess potential risks that included operational changes and credit risk and the management of increased rejection rates.
The approval of this reform will lead to lower capital costs for FPIs which will improve cash-flow operations of international investors while allowing India's equity markets to operate more efficiently.