SEBI Permits Net Settlement of Funds for FPIs in Cash Market. What It Means for Foreign Investors
Updated: Aug 11
Last Reviewed and Updated: 17 Aug 2026
Circular No: HO/(1)2026-AFD-POD2/I/10157/2026 | Issued: 24 April 2026 | Implementation Deadline: 31 December 2026
The Problem This Solves
Foreign Portfolio Investors (FPIs) currently settle all their cash market transactions on a gross basis, meaning each buy and each sell is settled independently regardless of whether the same FPI has offsetting positions in the same or different securities.
This has been a persistent pain point. Market participants flagged that gross settlement creates three specific inefficiencies:
Higher funding costs: FPIs must arrange funds for gross buy obligations even when they have simultaneous sell proceeds that could offset those buys.
Forex slippage: Converting currency to meet gross obligations and then converting back the excess from sell proceeds creates multiple forex transactions, each with associated costs.
Operational strain on index rebalancing days: When FPIs need to simultaneously buy and sell large numbers of securities to track index changes, gross settlement multiplies the operational burden.
What SEBI Has Now Allowed
SEBI has permitted net settlement of funds for outright transactions by FPIs in the cash market, to be implemented on or before 31 December 2026.
Under net settlement, an FPI’s total buy obligations and sell proceeds across eligible transactions on a given settlement date are offset against each other. Only the net payable or receivable amount is transferred.
SEBI has illustrated that the pay-in obligation can fall by as much as half compared to the current gross settlement model, in a representative example.
What Is and Isn’t Eligible for Netting
Eligible (net settled): Transactions where an FPI is either only buying or only selling a given security on a given day. These can be combined across all eligible securities to arrive at a single net position.
Not eligible (stays gross): Any security where the FPI has both a buy and a sell transaction on the same day. These must continue to be settled on a gross basis.
Important asymmetry: If outright sales exceed outright purchases, the surplus can be netted. If outright purchases exceed outright sales, only the outright purchases up to the value of outright sales can be netted; the remaining buy obligation stays gross.
What Stays Unchanged
Securities settlement remains gross: Only the funds leg is being netted. The actual transfer of shares between depository accounts continues to happen on a gross, trade-by-trade basis.
STT and stamp duty unchanged: Securities Transaction Tax and stamp duty continue to be calculated on the gross value of each individual transaction, not the net. The tax bill does not change.
Implementation Timeline
All custodians, clearing corporations, exchanges, and FPIs must have the necessary systems and processes in place by 31 December 2026 to support net settlement. Custodians will be responsible for computing and submitting net settlement obligations on behalf of their FPI clients.
Why This Matters for Indian Markets
FPIs have been among the most active participants in Indian equities, and also among the most vocal about operational friction. Gross settlement has been a recurring complaint in consultations with international investors.
Reduced funding costs and forex slippage make Indian equities marginally more attractive to foreign institutional capital. This is not a game-changing reform, but it is a meaningful incremental improvement in India’s attractiveness as an investment destination.
Source: Securities and Exchange Board of India (SEBI) | Circular No. HO/(1)2026-AFD-POD2/I/10157/2026
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