The paper comes in the wake of heavy selling by foreign investors over the past year. Financial institutions have sold $21 billion worth of shares as of early 2025.While custodians ultimately settle with clearing houses on a net basis, FPIs are required to contribute the full amount for purchases and separately deliver securities for sale, leading to higher temporary liquidity needs.
Sebi noted that this structure often leaves FPIs underinvested by at least one day and exposes them to additional costs such as missing out on currency conversions and short-term financing costs. These problems become more apparent during index rebalancing days, when FPIs execute large buying and selling transactions simultaneously.
In the proposed framework, Sebi has proposed to allow “netting of funds” for outright purchase and outright sale transactions executed by an FPI in the spot market on the same settlement day. This would allow the sale proceeds to be offset against the purchase liabilities, leaving FPIs to finance only the net cash amount.
However, transactions where an investor both buys and sells the same security within the same settlement cycle will still be settled on a gross basis, in accordance with existing rules. Sebi said discussions with custodians, clearing houses and exchanges revealed potential risks, including a higher chance of transaction rejection and increased settlement risk for custodians. Market participants also raised concerns over the readiness of the system during busy trading days and lack of margin collection for FPI money market transactions.
To address these risks, Sebi pointed out that India’s clearing system already has strong safeguards in place, such as default cascade mechanisms and core settlement guarantee funds.
The regulator also said that custodians would need to upgrade their systems to handle the proposed settlement process, while settlement between custodians and clearing houses would continue on a net basis, as is currently the case.
Importantly, Sebi clarified that settlement of securities will continue on gross delivery basis and securities transaction tax and stamp duty will continue to be applicable as per existing norms. The regulator said the proposed change is aimed at reducing funding stress without increasing systemic risk or enabling excessive intraday trading by FPIs.
The regulator has sought public comment on the proposal and proposed mitigations, with feedback open until February 6 before a final decision is made.
(Disclaimer: Recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of Economic Times)
#Sebi #proposes #relax #cash #settlement #norms #foreign #investors #reduce #financing #costs