SEBI Allows Net Settlement of Funds for FPIs in Cash Market – Major Relief for Foreign Investors

SEBI Allows Net Settlement of Funds for FPIs in Cash Market – Major Relief for Foreign Investors

The Securities and Exchange Board of India (SEBI), through Circular No. HO/(1)2026-AFD-POD2/I/10157/2026 dated 24 April 2026, has introduced a new framework for net settlement of funds for transactions done by Foreign Portfolio Investors (FPIs) in the cash market.

This move is aimed at improving operational efficiency and reducing the funding cost burden for FPIs, especially during heavy trading periods such as index rebalancing days.

Earlier, FPIs had to settle all transactions on a gross basis with custodians, even though custodians settled deliveries on a net basis with Clearing Corporations (CCs). This created additional liquidity requirements, higher funding costs, forex slippage, and operational inefficiency.

What is Net Settlement?

Under the new system, FPIs will be allowed to settle only the net fund obligation instead of separately paying full purchase value and receiving full sale value for eligible transactions.

This significantly reduces unnecessary cash movement and improves ease of doing business for foreign investors.

Only for “Outright Transactions”

This benefit applies only to outright transactions.

SEBI defines outright transactions as:

Either only a purchase transaction or only a sale transaction in a security during one settlement cycle — but not both.

Security	Transaction Type	Eligible for Net Settlement?
Stock A	Only Purchase	Yes
Stock C	Only Sale	Yes
Stock B	Both Buy + Sell	No

Transactions involving both purchase and sale in the same security during the same settlement cycle are called non-outright transactions and will continue on gross settlement basis.

Framework for Net Settlement

Rule 1 – Netting Allowed Only for Outright Transactions

FPI transactions involving only outright buy or only outright sell will be netted to determine the final fund obligation.

Rule 2 – Non-Outright Transactions Continue on Gross Basis

If both purchase and sale exist in the same security during one settlement cycle, those transactions will continue to follow the old gross settlement method.

Rule 3 – Excess Sale Value Cannot Adjust Other Buy Obligations

If outright sales exceed outright purchases, the excess sale value cannot be adjusted against non-outright purchase obligations.

Rule 4 – Residual Amount Must Be Funded by FPI

If outright purchase value exceeds outright sale value, the remaining amount along with non-outright purchase obligations must be funded by the FPI.

SEBI Example Explained

Stock	Buy Quantity	Buy Value	Sell Quantity	Sell Value
A	10	₹1000	0	₹0
B	10	₹1000	20	₹2000
C	0	₹0	20	₹2000

Here:

• Stock A = outright purchase
• Stock C = outright sale
• Stock B = both buy and sell (non-outright)

Only Stock A and Stock C are netted. Stock B remains under gross settlement. This illustration is given in Annexure A of the circular (pages 4 to 6).

Before vs After SEBI Circular

Particular	Old System (Gross Settlement)	New System (Net Settlement)
Funds Pay-in	₹2000	₹1000
Funds Pay-out	₹4000	₹3000
Securities Settlement	Gross Basis	Still Gross Basis

This clearly reduces funding pressure and improves operational efficiency for FPIs.

Important Clarification

Only Fund Settlement becomes Net.

Securities Settlement will continue on Gross Basis between:

FPI ↔ Custodian

Also:

• Securities Transaction Tax (STT)
• Stamp Duty

will continue to be charged on delivery basis exactly as before.

Implementation Timeline

Particular	Date
Circular Date	24 April 2026
Implementation Deadline	On or before 31 December 2026

Custodians, FPIs, stock exchanges, clearing corporations, and brokers must make the necessary system changes before this deadline. }

Who Will Create Implementation Standards?

The standards will be formulated by:

Custodians and Designated Depository Participants Standards Setting Forum (CDSSF)

after consultation with stakeholders.

Legal Authority

This circular is issued under:

• Section 11(1) of the SEBI Act, 1992
• Regulation 44 of SEBI (Foreign Portfolio Investors) Regulations, 2019

with the objective of protecting investor interests and promoting the development of the securities market.

Final Words

This SEBI reform is a major step toward improving India’s capital market efficiency for foreign investors.

By allowing net settlement of funds for eligible FPI transactions, SEBI has reduced unnecessary liquidity pressure and funding costs without changing securities delivery systems.

This makes Indian markets more globally competitive, operationally efficient, and investor-friendly.

Custodians, brokers, and FPIs should prepare for implementation before 31 December 2026.

Stay updated. Stay compliant.