The Securities and Exchange Board of India (SEBI) has to permit netting of funds for transactions done by foreign portfolio investors (FPIs) in the cash market. The proposal follows based on feedback received by the regulator that existing provisions lead to additional liquidity demand and inefficiency for FPIs.
Additional costs due to slippage, large inflows and outflows during index rebalancing and additional days in global custodian lines were brought to the regulator’s notice.
The proposal seeks to review existing provisions and practices related to gross settlement, improve efficiency in operations and reduce funding costs for FPIs. The proposed change was presented for comments after discussions were held with custodians, clearing corporations and stock exchanges, during which risks and challenges – including potentially higher rejection rates, credit and clearing system risks, and operational changes at clearing corporations – were discussed.
Under the proposed changes in fund netting, securities transactions involving both buy and sell legs for an FPI within a settlement cycle will be excluded from netting.
Securities transactions with only outright sales and outright purchases shall be netted to arrive at a net fund obligation for outright transactions. Where the outright sell value is not more than the outright buy, the residual amount and non-outright buy obligations shall be funded by the FPI. Where the outright sell value is more, the excess will not be adjusted towards non-outright buy obligations.
The SEBI also clarified that securities settlement will continue on a gross basis between FPIs and custodians, and that securities transaction tax and stamp duty will be charged on a delivery basis.
