Whalesbook
Securities and Exchange Board of India (Sebi) is set to ease liquidity pressures for foreign portfolio investors (FPIs) by proposing same-day fund netting for cash market transactions. This regulatory shift aims to slash funding costs and streamline operations, especially during periods of high trading volumes.
Current Hurdles
Under the existing framework, FPIs must settle all purchase and sale transactions on a gross basis. This means even if buy and sell values offset each other, separate funding and delivery are required. Such a system creates operational inefficiencies and elevates funding costs for foreign investors, who often rely on short-term credit lines and face forex slippage.
The Netting Proposal
Sebi's proposed netting mechanism will permit FPIs to use proceeds from sale transactions on a given day to fund their purchase transactions within the same day. This would enable FPIs to fulfill only the net fund obligation, freeing up capital and reducing the need for immediate, gross funding.
The proposal is restricted to 'outright' transactions, where purchases in one security can be offset against sales in another. Crucially, netting will not apply to situations where an FPI buys and sells the exact same security within a single settlement cycle, a safeguard designed to prevent market manipulation.
Addressing Concerns
Sebi acknowledged potential operational risks highlighted by custodians, clearing corporations, and stock exchanges. These include increased trade rejection likelihood and settlement risk. However, the regulator stated that existing safeguards, such as default waterfall mechanisms and settlement guarantee funds, adequately mitigate these concerns.
What Remains Unchanged
Securities settlement between FPIs and custodians will continue on a gross basis. Consequently, Securities Transaction Tax (STT) and stamp duty will remain unchanged, levied on delivery-based transactions. Implementation will necessitate amendments by both Sebi and the Reserve Bank of India (RBI).
This move follows Sebi's recent initiatives to simplify FPI onboarding, including digital signatures and a single-window platform, indicating a broader effort to make India a more attractive investment destination.