Research and Articles

• SEBI approves introduction of netting of funds for FPIs in cash market transactions, limited to outright transactions.

• Reform aimed at improving capital efficiency and reducing temporary funding and transaction costs for FPIs.

• Implementation expected on or before December 31, 2026, subject to system and regulatory changes. 

INTRODUCTION

At its 213^th board meeting held on March 23, 2026 (“Board Meeting”)¹, the Securities and Exchange Board of India (“SEBI”), approved a key change in the Foreign Portfolio Investors (“FPIs”) space aimed at improving ease of doing business measure.

The approved change permits ‘netting of funds’ for ‘outright transactions’ done by FPIs in cash market, which is expected to enhance operational efficiency and reduce funding costs. 

This reform has been introduced pursuant to the SEBI’s consultation paper dated January 16, 2026 (“Consultation Paper”)², which proposed enabling such a netting mechanism based on market feedback. In this hotline, we set out the brief analysis of the approved change.

EXISTING FRAMEWORK

In terms of SEBI’s Master Circular for Stock Exchanges and Clearing Corporations (“CCs”) dated December 30, 2024, institutional investors are not allowed to do day trading, i.e., squaring off transactions intra-day.

Under the current regime, all transactions are grossed at custodians’ level and investors are required to fulfill their obligations on a gross basis. Therefore, FPIs are also required to settle on a gross basis at the custodian level, wherein an FPI needs to provide funds toward purchase transactions independent of sale transactions. The custodians, however, are allowed to settle their deliveries on a net basis with the CCs.

This created significant liquidity pressures, as FPIs are required to arrange funds for purchases even where there are offsetting sale proceeds on the same day. For instance, an FPI has purchased stock X worth INR 10 million and sold stock Y worth INR 10 million. The FPI would need to deliver stock Y and make available INR 10 million towards purchase of stock X. As a part of the pay-out, FPI would receive stock X and receive back INR 10 million towards consideration for sale of stock Y. It may be argued that this pay-in obligation of INR 10 million results in FPI being underinvested to that extent for at least one day, which otherwise could have been adjusted against the settlement proceeds of the sale transaction.

The current regime also results in foreign exchange slippage, as FPIs are often required to convert foreign currency into INR to meet purchase obligations and subsequently reconvert sale proceeds back into foreign currency, exposing them to exchange rate fluctuations arising purely from timing mismatches. Further, FPIs that rely on global custodian credit lines incur additional funding costs, as short-term financing may be required to bridge settlement obligations until sale proceeds are received. These inefficiencies become particularly pronounced during index rebalancing periods, when large volumes of simultaneous purchases and sales significantly increase temporary funding requirements and associated transaction costs.

NETTING FRAMEWORK APPROVED IN BOARD MEETING

In order to address the above issues and based on stakeholder feedback, SEBI reviewed the existing gross settlement framework and proposed a framework permitting ‘netting of funds’ for ‘outright transactions’ undertaken by FPIs in the cash market through the Consultation Paper.

As defined in the Consultation Paper, ‘netting of funds’ refers to the utilisation of sale proceeds from cash market transactions undertaken on a particular day to fund purchase transactions executed by the FPI on the same day, thereby requiring the FPI to discharge only the resultant net fund obligation. “Outright transactions” are defined to mean those transactions done by an FPI where there is either a purchase or a sale transaction, but not both, in a security in a particular settlement cycle.  

Pursuant to the public consultation process, SEBI has now approved the netting framework permitting FPIs to net fund obligations for cash market transactions, subject to the following conditions:

• Netting will be permitted only for outright transactions, i.e., securities where there is either a buy or a sell position in a settlement cycle, but not both. Using the same example as explained above wherein FPI purchases stock X worth INR 10 million and sells stock Y worth INR 10 million, upon implementation, the FPI would only be required to deliver stock Y, while the pay-in obligation towards purchase of stock X would stand adjusted against the sale proceeds.

• Netting of funds is permitted only for outright transactions. Accordingly, transactions involving both buy and sell positions in the same security, i.e., non-outright transactions (intra-day or otherwise), will continue to be settled on a gross basis. For example, where an FPI sells stock X worth INR 10 million and also purchases stock X for any amount within the same settlement cycle, such transactions will not qualify for netting. In such cases, the FPI will be required to independently fund the purchase obligation, without adjustment against the sale proceeds of stock X.

• Where outright sales are lower than outright purchases, the FPI will be required to fund the residual purchase obligation after netting, together with any non-outright buy obligations.

• Excess sale proceeds arising from netting cannot be used to offset non-outright buy obligations.

• Settlement of securities will remain on a gross basis between the FPI and the custodian.

• Securities Transaction Tax and stamp duty will continue to apply on a delivery basis, as per the existing framework.

Netting of funds has not been extended to non-outright transactions (intra-day or otherwise), given the inherent concerns relating to potential market influence arising from large FPI positions or speculative trading activity.

CONCLUDING THOUGHTS

The introduction of fund netting mechanism is a significant step towards aligning India’s FPI framework with global market practices. By reducing the need for temporary funding and minimizing idle capital, the reform is likely to improve capital efficiency for FPIs and lower transaction costs, particularly for large institutional investors. At the same time, retention of gross settlement for non-outright transactions preserves existing safeguards against potential market influence arising from large FPI positions.  

As noted in the Consultation Paper, the framework is expected to mitigate operational risks by reducing the likelihood of trade rejections arising from reconciliation failures or shortfall of funds or securities, which may otherwise devolve settlement obligations onto executing brokers. Existing safeguards, including the default waterfall mechanism and the Core Settlement Guarantee Fund (Core SGF), will continue to remain in place, while reduced funding obligations are expected to lower instances of purchase transaction rejections due to fund shortages. To address potential operational or system-related constraints, custodians will be mandated to upgrade their systems as part of implementation.

From an implementation standpoint, the framework will require coordination among custodians, CCs, and FPIs, along with necessary regulatory and system-level changes. Given the required system and process modifications, the approved changes are expected to be implemented on or before December 31, 2026.

Overall, this reform marks a progressive shift in India’s FPI regime, reinforcing SEBI’s focus on ease of doing business while maintaining risk management safeguards.

Akash Shirore and Chandrashekar K
You can direct your queries or comments to the authors.

¹SEBI | Key decisions taken in the SEBI Board Meeting dated 23rd March, 2026. Available here.

²SEBI | Consultation Paper on proposal to permit netting of funds for transactions done by Foreign Portfolio Investors (FPIs). Available here.