SEBI Approves Net Settlement for FPIs, Eases AIF Rules

Introduction to SEBI's Market Reforms

The Securities and Exchange Board of India (SEBI) approved several significant proposals during its board meeting on March 23, 2026, aimed at enhancing the ease of doing business and improving market efficiency. The key decisions include permitting net settlement of funds for Foreign Portfolio Investors (FPIs) and providing a more flexible framework for Alternative Investment Funds (AIFs) to wind up their schemes. These measures are expected to reduce costs for foreign investors and streamline operations for fund managers.

Streamlining FPI Transactions with Net Settlement

One of the most impactful changes is the introduction of a net settlement facility for FPIs in the cash market. Under the existing gross settlement mechanism, FPIs are required to settle every transaction individually. This means if an FPI buys shares worth ₹100 crore and sells different shares worth ₹100 crore on the same day, it must arrange funds for the full purchase amount, leading to higher funding costs and potential foreign exchange slippages.

SEBI Chairman Tuhin Kanta Pandey noted that the regulator recognized these concerns. The new framework will allow FPIs to offset their purchase obligations with proceeds from sales within the same settlement cycle. Consequently, they will only need to settle the net payable amount. This reform is designed to enhance operational efficiency and significantly reduce the cost of funding for FPIs. The implementation of this new system is scheduled to be completed on or before December 31, 2026.

The Impact on Foreign Portfolio Investors

The move to net settlement is a direct response to feedback from foreign investors and comes after a period of significant outflows from Indian equity markets over the past 12-15 months. By lowering transaction costs and funding requirements, SEBI aims to make the Indian market more attractive and competitive. The benefits will be particularly noticeable on high-volume trading days, such as during index rebalancing, when large transactions can strain FPIs' funding arrangements. The change is expected to minimize forex-related costs that arise from timing mismatches between fund inflows and outflows.

New Flexibility for Alternative Investment Funds (AIFs)

SEBI has also addressed a long-standing issue for AIFs. Previously, AIFs were required to distribute all liquidation proceeds and achieve a nil bank balance before they could surrender their registration certificate. This proved difficult for funds with pending or anticipated tax demands, litigation, or residual operational expenses. As a result, many AIFs had to maintain their registration and adhere to full compliance requirements even when they were no longer actively managing funds.

To resolve this, SEBI has introduced a framework for tagging such AIFs as 'inoperative funds'. These funds will have lighter compliance obligations until their registration is formally surrendered. This status can be achieved if the AIF meets specific conditions for retaining funds beyond its permissible life.

Key Provisions of the AIF Framework

The new rules provide clear conditions under which an AIF can retain proceeds while winding up. This structured approach offers a practical solution for fund managers navigating the final stages of a fund's life cycle.

Broader Agenda for Market Reforms

The SEBI board meeting covered a wide range of other regulatory proposals. A comprehensive overhaul of the 'fit and proper person' criteria for market intermediaries was discussed. The proposal aims to shift the disqualification trigger from the initiation of winding-up proceedings to a final winding-up order, providing more procedural fairness. The regulator is also looking to formally include the right to a hearing in its rules.

Additionally, the board considered proposals to simplify operations for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). Another key discussion point was the review of minimum investment thresholds for Social Impact Funds (SIFs) to encourage greater participation from retail investors.

Market Context and Significance

These reforms are part of SEBI's broader effort to reduce market friction and respond to the evolving needs of investors. The decision to ease FPI settlement norms is particularly timely, given the recent volatility in foreign fund flows. By addressing operational hurdles for both foreign and domestic investment vehicles, SEBI is working to strengthen the structural framework of the Indian capital markets, making them more robust and investor-friendly.

Conclusion

The decisions from SEBI's latest board meeting represent a proactive step towards modernizing India's market infrastructure. The approval of net settlement for FPIs and the creation of a flexible winding-up process for AIFs are significant measures that will lower costs and improve efficiency. As these rules are implemented, they are expected to enhance investor confidence and reinforce India's position as an attractive investment destination.