SEBI move to allow net fund settlement for FPIs: What changes for foreign investors and markets?

The Securities and Exchange Board of India has cleared a significant market-structure change for Foreign Portfolio Investors (FPIs) operating in the equity cash segment. SEBI has proposed – and placed before its Board for approval – a framework that will allow FPIs to settle funds on a net basis for specified transactions, instead of the current gross settlement at investor level.

This shift aims to lower funding and forex costs, particularly on high‑volume days such as index rebalancing, while retaining the existing risk safeguards of clearing corporations and custodians. Implementation is proposed on or before December 31, 2026.

Current framework: How FPIs settle cash market trades today

Under the existing regime:

  • Regulation 20(4) of SEBI (FPI) Regulations, 2019 requires FPIs to transact in India only on a delivery-versus-delivery basis – i.e., actual delivery of securities both on purchase and sale.
  • As per SEBI’s Master Circular for Stock Exchanges and Clearing Corporations dated December 30, 2024, institutional investors (including FPIs):
    • Cannot undertake day trading or intra-day square-offs.
    • Have their obligations computed and settled on a gross basis at the FPI level by custodians.
    • Custodians, in turn, settle net obligations with the clearing corporations (CCs).

In practice, this means that even if an FPI has matching buy and sell flows on the same day, it must independently fund purchases and deliver securities for sales, without any offsetting at its own level.

Illustrative impact of gross settlement

Consider an FPI that:

  • Purchases shares of Company X worth Rs. 100 crores; and
  • Sells shares of Company Y worth Rs. 100 crores on the same day, same settlement cycle.

Under the current system:

  • The FPI must:
    • Deliver Company Y’s shares; and
    • Separately arrange Rs. 100 crores to pay for the purchase of Company X.
  • On pay‑out:
    • It receives shares of Company X; and
    • It receives Rs. 100 crores as sale proceeds for Company Y.

Even though the buy and sell legs are broadly matched in value, the FPI still needs to bring in Rs. 100 crores of additional liquidity for a day, which:

  • Ties up capital that could otherwise remain invested;
  • Requires separate forex purchase and sale, exposing the FPI to currency slippage;
  • Increases funding costs, particularly for FPIs using credit lines from global custodians.

These inefficiencies become more pronounced on index rebalancing days, when large-scale entry/exit trades in index constituents occur simultaneously, sharply increasing funding needs.

Why SEBI is reconsidering gross settlement

SEBI received representations highlighting that the gross settlement requirement for FPIs is:

  • Liquidity-intensive: FPIs must maintain higher rupee balances or arrange short-term funding lines to meet gross pay‑in obligations.
  • Costly in forex terms: FPIs often need to buy INR for purchases and then re-sell INR on receipt of sale proceeds, incurring spread and timing risk.
  • Expensive on funding: Those using credit limits from overseas custodians effectively incur an extra day of borrowing cost.

To address these frictions, SEBI has proposed to allow netting of funds at the FPI level in the cash market, in a defined and risk‑contained manner.

Definition (for this framework):
“Netting of funds” means utilisation of sale proceeds from cash market transactions executed by an FPI on a particular day to meet its purchase obligations in the cash market on the same day, such that the FPI is required to fund only its net fund obligation.

Consultations with stakeholders and concerns examined

SEBI discussed the proposal with:

  • Custodians
  • Stock exchanges
  • Clearing corporations
  • SEBI’s FPI Advisory Committee

Thereafter, a consultation paper dated January 16, 2026 was issued, inviting public comments on permitting netting of funds for “outright transactions” in the cash market.

Outright transactions
For this proposal, these are transactions where an FPI has only purchases or only sales in a particular security in a given settlement cycle. If both buy and sell exist in the same security in the same settlement cycle, it is treated as a non‑outright transaction and is excluded from netting.

Key risk concerns raised and SEBI’s responses

1. Potential increase in trade rejection rates

Concerns raised

  • At present, an FPI must independently fund each purchase, without reliance on any sale leg. Hence, if a sale leg fails confirmation, the purchase may still go through if sufficiently funded.
  • Under netting, purchases might be linked to sales; if a sale transaction is rejected or delayed, the corresponding purchase could also be rejected.
  • This could push settlement obligations to the executing broker and elevate risk, especially on high‑volume index rebalancing days when systems are more vulnerable to delays or glitches.
  • Since no margin is collected from brokers or custodians for FPI cash market trades, rejections of large FPI trades could potentially stress CCs and the broader settlement framework.

SEBI’s position