The Securities and Exchange Board of India (SEBI) has approved Foreign Portfolio Investors (FPIs) to net funds for same-day cash market transactions. This move is aimed at enhancing operational efficiency and reducing funding costs, particularly during index rebalancing periods.
Under the new framework, FPIs can utilize proceeds from sale transactions in the cash market on a given day to finance their purchase transactions on the same day. This means they only need to meet the net fund obligation instead of settling each trade individually.
Market participants have raised concerns about the current practice where FPIs settle trades with custodians on a gross basis. This method results in higher liquidity requirements, increased funding costs, and foreign exchange slippages, especially during index rebalancing days.
SEBI specified in its circular that the netting facility will be applicable only to “outright transactions,” which are defined as either a purchase or a sale transaction in a security within a settlement cycle, but not both.
The regulator clarified that in situations where the value of outright sales is less than outright purchases, the remaining amount along with non-outright purchase obligations must be funded by the FPI. Conversely, any surplus from outright sales exceeding outright purchases cannot be used to offset non-outright purchase obligations.
Furthermore, while funds can be netted under the new system, the settlement of securities will still be conducted on a gross basis between the FPI and the custodian. Levies such as Securities Transaction Tax (STT) and stamp duty will also continue to apply on a delivery basis.
