MUMBAI: Indian custodians are preparing for operational disruption after the Securities and Exchange Board of India (Sebi) approved a shift to net settlement of trades for foreign portfolio investors (FPIs), pressing ahead despite industry calls to make the change optional.
The move, cleared at Sebi’s March board meeting, allows FPIs to settle funds on a net basis in the cash market, replacing the current system where each leg of a transaction is settled separately. The change is aimed at reducing funding costs and aligning India with global practices, but intermediaries warn it could strain systems and workflows.
Some industry participants have also questioned the timing amid volatile global conditions.
Under the current gross settlement system, FPIs must fund each transaction independently. If an investor buys and sells ₹100 crore worth of stocks, it must bring in funds for the purchase and separately deliver the sale, even if the net cash position is zero.
Netting removes that inefficiency by offsetting obligations. In the same example, the proceeds from the sale can be used to fund the purchase, eliminating the need to bring in ₹100 crore. It also compresses timelines within the settlement chain, requiring trades to be confirmed by evening for settlement the next morning, leaving less room for late changes.
“Recognizing these concerns, and with a view to enhancing operational efficiency and reducing cost of funding for FPIs, it has been decided to permit net settlement of funds for outright transactions done by FPIs in cash market, i.e., transactions in which there is either purchase or sale transactions, but not both, in a security in a settlement cycle,” Sebi said in a press release following its March board meeting.
But custodians, who sit at the centre of trade execution and settlement, say the shift introduces operational complexity, especially in a market where trades flow through multiple layers of global and local intermediaries.
“It may not be a great time to implement netting right now due to the current geopolitical tensions. FPIs may become cautious due to so many changes being implemented by custodians at such a volatile time. But, the regulator is of the view that though the changes might take some time, it is the need of the hour,” said Utkarsh Singh, senior manager, custody business development at SBI-SG Global Securities Services.
FPI trades are routed through a global custodian (GC), then a local custodian, before being processed via depositories and clearing corporations.
Custodians have flagged difficulties in accommodating late trade changes, common for FPIs operating across time zones, once positions are netted.
“There would be business implications on custodians as a lot of churning will happen during the day. FIIs may make changes to trades based on their time zones, which is late at night for us. This may make it difficult for custodians to make changes last minute when trades are netted,” said Singh.
He added that 60-70% of FPIs route their trades through a global custodian.
“Custodians prefer gross settlement as netting across FPIs would make the system inefficient for GCs. Some custodians have done digitisation to maintain a very robust system. Those who don't have it will face a problem,” said an industry participant on the condition of anonymity.
The operational burden extends beyond timelines to system changes and client coordination.
“Custodians are saying that the new norms should not be made compulsory as tax and netting will create confusion. If ₹100 is sold and ₹55 bought, only ₹45 will be paid to the investor. If tax is ₹6, then ₹39 would be paid. In actual parlance, when there are crores worth of money, it becomes complicated to explain to a global custodian,” said a member of a clearing corporation on the condition of anonymity.
“Global custodians will have to change their systems. They have to offer settlement on both net and gross basis. These changes will take some time,” the person added.
These concerns were flagged to a Sebi-constituted working group months before the proposal was finalized, but the board approved the framework nonetheless.
Sebi has limited netting to outright transactions, where there is either a buy or a sell in a security within a settlement cycle, while retaining existing safeguards. Taxes such as securities transaction tax and stamp duty will continue to be levied on a delivery basis.
The regulator has also provided a long implementation runway, with the framework to be rolled out by 31 December 2026.
“We had told the working group about all of this before the board meeting. We will wait for the fine print to come,” the clearing executive said.
For FPIs, however, the direction of travel is clear.
“By aligning India with international settlement standards, this move slashes funding costs and reinforces our market’s appeal as a frictionless destination for global capital,” said Khushboo Chopra, head of business development at IQ-EQ, a global investor services provider.