In order to enhance operational efficiency and reduce cost of funding for foreign portfolio investors (FPIs), the Securities and Exchange Board of India (SEBI) on Friday proposed to allow netting of funds for transactions carried out by foreign investors in the cash market. Netting of funds means using the proceeds of sale transactions in the cash market on a particular day to fund the purchase transactions in the cash market done by an FPI on the same day, thereby requiring FPI to fulfill only the net fund obligation. “It is proposed to permit netting of funds for outright transactions done by FPIs in the cash market,” the market regulator proposed in a consultation paper.

Outright transactions refer to those transactions done by an FPI where there is either a purchase or a sale transaction, but not both, in a security in a particular settlement cycle. The transactions in securities with only outright sale or outright purchase will be netted to arrive at a net fund obligation for outright transactions, SEBI recommended. As per regulations, FPIs are required to transact in securities in India only on the basis of taking and giving delivery of securities purchased or sold.

Also, institutional investors are not allowed to do day trading i. e. , square-off their transactions intra-day.

All transactions are grossed at custodians’ level and investors are required to fulfill their obligations on a gross basis. The market regulator said that the current practice of gross settlement of transactions done by FPIs is leading to additional liquidity demand and inefficiency for these investors.

Story continues below this ad In the proposed mechanism, the transactions in those securities where there are both buy and sale transactions for a given FPI in a particular settlement cycle will be excluded from netting. Therefore, netting of intra-day transactions in the same securities shall be excluded and such non-outright transactions shall continue to be confirmed on a gross basis, as per the current procedure, the paper said. The regulator, however, clarified that settlement of securities shall continue to be carried out on a gross basis between FPIs and custodians.

Accordingly, Securities Transaction Tax (STT) and stamp duty shall continue to be charged on delivery basis. “The above proposal would help in reducing cost of funding for FPIs, especially on index rebalancing days, considering there would be outright purchases or sales in incoming or outgoing stocks in an index,” it said.

Also, considering that non-outright transactions are proposed to be confirmed on a gross basis, this would address the risk of swaying of markets by FPIs holding large quantities of securities, it said. Story continues below this ad Separately, SEBI also said it will enable a unified registration process across multiple investment routes and will minimise repeated compliance requirements and documentation for FPIs and Foreign Venture Capital Investors (FVCIs).

The two initiatives are part of the Single Window Automatic and Generalised Access for Trusted Foreign Investors (‘SWAGAT–FI’) framework for FPIs and FVCIs. These benefits can be availed by existing as well as new FPIs that meet specified eligibility criteria.

FPIs registered with SEBI such as central banks, sovereign wealth funds, appropriately regulated and broad based mutual funds, insurance companies and pension funds will be the beneficiaries of these changes, the regulator said.