Foreign portfolio investors (FPIs) will be able to settle stock market trades by paying only the net difference, rather than the full amounts, by December.
On Friday, India’s markets regulator issued a detailed framework formalizing a decision cleared at its March board meeting to permit net settlement of funds for outright transactions, with the aim of improving operational efficiency and lowering funding costs for foreign investors.
The Securities and Exchange Board of India (Sebi) had formed a working group in 2025 to discuss the netting framework and issued a consultation paper in January.
Under the existing regime, FPIs are required to settle each leg of a trade separately, even if their net position across buy and sell transactions is zero.
The new norms have been mandated to come into effect by 31 December. The regulator has asked the Custodians and Designated Depository Participants Standards Setting Forum (CDSSF) to come up with implementation standards after consulting relevant stakeholders.
“Netting of FPI trades will make India a more attractive market for FPIs in the long run, as most developed markets net FPI transactions. Implementation will take some time, but the prescribed timeline should be sufficient,” said Utkarsh Singh, senior manager, custody business development at SBI-SG Global Securities.
In developed markets, such as the US, trades are netted for operational efficiency. Similar mechanisms are also used across the European Union, and markets like the UK and Singapore, where clearing corporations offset buy and sell obligations before settlement.
FPI-friendly
The gross settlement of transactions by FPIs has long been flagged by market participants as capital-intensive and inefficient, the Sebi circular said.
For instance, an investor buying and selling ₹100 crore worth of shares in a single session currently needs to fund the purchase in full while delivering the sale proceeds independently, despite there being no net cash outflow. The new framework allows such obligations to be offset, eliminating the need to move large sums purely for settlement purposes.
However, net settlement of transactions is permitted only for outright transactions, which involve buying and/or selling different securities within a settlement cycle. Transactions in securities having both purchase and sale transactions will be settled on a gross basis.
The move comes despite some custodians flagging operational inefficiencies in implementing such changes to transactions during a period of volatility.
Mint reported on 3 April that custodians and market intermediaries are bracing for operational disruption due to the systemic changes required to execute netting of FPI transactions, which is often layered and involves multiple stakeholders, including global custodians. The concerns were flagged to Sebi by the working group.
Settlement of securities will continue to take place on a gross basis between FPIs and custodians, while Securities Transaction Tax (STT) and stamp duty will remain applicable on a delivery basis, said the Sebi circular.
