SEBI net settlement for FPIs: rules by Dec 2026

What SEBI changed for foreign investors

The Securities and Exchange Board of India (SEBI) has operationalised its earlier proposal to allow net settlement of funds for Foreign Portfolio Investors (FPIs) in the cash market. The regulator has set December 31, 2026 as the deadline for implementation. The change is designed to make cash-market settlement more capital-efficient for foreign investors by reducing the peak funds they need to deploy during a settlement cycle.

SEBI’s framework is narrow by design. It allows netting of fund obligations only in specific cases, while keeping other parts of the settlement chain unchanged. Market infrastructure institutions and intermediaries have been asked to prepare system upgrades and processes ahead of the deadline.

The deadline and who must prepare

SEBI has asked exchanges, clearing corporations, custodians, and FPIs to put in place the necessary systems before the cut-off date. The regulator noted that implementation standards will be finalised by the Custodians and Designated Depository Participants (DDP) Standards Setting Forum, in consultation with stakeholders.

The framework signals that SEBI wants the operational benefit of netting without weakening settlement discipline. The lead time of about nine months, as referenced in SEBI’s consultation and subsequent approval process, is intended to allow technology changes, testing, and standard operating procedures across the ecosystem.

What “net settlement” means in this framework

Under the revised approach, FPIs can offset sale proceeds against purchase obligations within the same settlement cycle, but only for defined transaction types. Netting of funds means an FPI would need to pay only the net payable amount for eligible trades, instead of paying full purchase obligations and separately receiving sale proceeds.

SEBI has positioned this as an ease-of-doing-business move that can lower temporary funding needs. The regulator and market participants have also linked the change to better handling of liquidity pressure during high-volume trading events such as index rebalancing.

Outright transactions: where netting is allowed

The netting permission applies to “outright transactions”. SEBI describes these as transactions where there is only a purchase or only a sale in a security within a settlement cycle. In such cases, the FPI’s fund obligations can be netted as per the approved framework.

By restricting netting to outright transactions, SEBI is separating simpler settlement flows from trades that can create more complex position-level settlement requirements. This is also meant to keep operational and risk controls aligned with existing processes.

Non-outright trades: where gross settlement continues

SEBI has clarified that trades where both buy and sell transactions occur in the same security during a settlement cycle will continue to be settled on a gross basis. This means an FPI cannot net funds for that security if it has both legs during the same cycle.

The continued use of gross settlement for these cases addresses concerns raised in discussions around settlement risks, rejection rates, and system challenges. SEBI has also referenced the role of existing safeguards such as the Core Settlement Guarantee Fund in mitigating risks in the current market structure.

Securities delivery and statutory levies remain unchanged

Even where fund obligations can be netted, settlement of securities between FPIs and custodians will continue on a gross basis. This is a key limitation that keeps the delivery side of settlement consistent with current custody and depository processes.

SEBI also clarified that statutory levies such as Securities Transaction Tax (STT) and stamp duty will remain unchanged and will continue to be applied on a delivery basis. The change is therefore operational in nature and does not alter tax or duty incidence.

How the proposal moved from consultation to operationalisation

SEBI’s consultation paper dated January 16, 2026 proposed allowing netting of funds for outright transactions by FPIs in the cash market. The regulator said public consultation showed strong support for the proposal. It also recorded that implementation should not be delayed too long, while acknowledging system changes needed across intermediaries.

SEBI’s current operationalisation follows discussions in a committee process and the board’s approval of the broad framework. The regulator has reiterated that the mechanism will require coordination among custodians, clearing corporations, and FPIs, along with system and process modifications.

Why SEBI sees capital-efficiency benefits

SEBI and market participants have linked netting to improved capital efficiency and potentially lower transaction-related funding costs for FPIs. The most direct benefit comes from a lower peak cash requirement when purchase pay-in obligations can be adjusted against sale proceeds, where eligible.

The framework has also been described as helpful in reducing liquidity pressure during periods of concentrated trading volumes, including index rebalancing windows. However, the regulator has retained gross settlement in areas it considers higher risk or operationally complex.

Implementation focus: standards, testing, and safeguards

SEBI said implementation standards will be finalised by the Custodians and DDP Standards Setting Forum in consultation with stakeholders. A suggestion captured in the consultation process was for SEBI to evaluate scenarios such as technical issues in settlement systems and defaults by market entities, using stress testing and scenario analysis, to build failsafe mechanisms.

SEBI has also pointed to existing risk safeguards, including the Core Settlement Guarantee Fund, while acknowledging that netting at investor level can require recalibration of downstream and upstream risk controls.

Key rules and dates at a glance

Other board-linked governance and market measures mentioned

Separately, the SEBI board also discussed governance-related steps referenced alongside the settlement reform. An expert panel was formed by SEBI chief Tuhin Kanta Pandey after his predecessor, Madhabi Puri Buch, faced allegations including conflict of interest. SEBI also said it would revise its code on conflict of interest for members of the board for voluntary adoption.

The board’s other measures mentioned with the settlement decision included classifying the SEBI chairperson and whole-time members as “insiders”, bringing them under the same legal trading restrictions as employees when in possession of price-sensitive information. Another change noted was allowing InvITs to hold special purpose vehicle (SPV) investments post-concession with a one-year exit or reinvestment requirement.

Conclusion

SEBI’s operationalisation of net fund settlement for FPIs narrows the benefit to outright cash-market transactions while keeping securities settlement gross and leaving STT and stamp duty unchanged. With standards to be finalised through the Custodians and DDP Standards Setting Forum, market infrastructure institutions and FPIs now have until December 31, 2026 to complete system readiness and implement the framework.