The Securities and Exchange Board of India (Sebi) on Monday allowed foreign portfolio investors to do net settlement of their outright buy or sell transactions in the cash market.
Addressing Forex Slippage
The regulator made this change after receiving feedback from the market participants about challenges due to gross settlement of transactions including forex slippage and operational inefficiency during days of market rebalancing.
Netting Mechanism
Under the new mechanism, transactions involving either buy or sell in a security will be netted to arrive at a net obligation of the FPI. So, if the value of outright sale is less than the value of outright purchase, the residual excess purchase value will be funded by the FPI. However, if the outright sale value is higher than outright purchase, the excess sell value will not be adjusted with any other non-outright purchase transaction.
For example, if an FPI buys stock A worth Rs 3,000 and sells stock B worth Rs 2,000, the net obligation of the FPI will be Rs 1,000. However, if there is another stock C in which the investor buys stock worth Rs 3,000 and sells stock worth Rs 2,000 simultaneously, then the investor will pay Rs 4,000 (Rs 3,000 for stock C + net obligation of Rs 1,000) and receive Rs 2,000 (for the sale of stock C).
The regulator has clarified that the settlement of securities between the FPI and custodian will continue to take place on a gross basis. Securities Transaction Tax (STT) and stamp duty will also continue to be charged on delivery basis. Sebi has asked custodians, FPIs and all relevant stakeholders to make necessary changes in their systems to effect the changes. The changes will have to be implemented on or before December 31, 2026.