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.
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
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
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
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.
