The Securities and Exchange Board of India (Sebi) unveiled a significant proposal on Friday. This move aims to streamline operations for foreign portfolio investors (FPIs) in the country's cash market.
What is the New Proposal?
Sebi wants to introduce a process called 'netting of funds' for these foreign entities. Under this system, an FPI can use the proceeds from its sale transactions on a given day to directly fund its purchase transactions on that same day.
How Does Netting Work?
Currently, FPIs must handle each transaction leg separately. For example, if an FPI buys shares worth Rs 100 crore and sells shares worth Rs 90 crore in a day, it must transfer Rs 100 crore for the purchase and also deliver shares worth Rs 90 crore for the sale.
The proposed netting mechanism changes this. The FPI would only need to meet the net fund obligation. In the same scenario, with a net purchase of Rs 10 crore (Rs 100 crore minus Rs 90 crore), the FPI transfers just Rs 10 crore.
Benefits of the Proposal
This proposal promises several advantages. It reduces the volume of fund transfers required daily. This cuts down on transaction costs and administrative burdens for FPIs.
Operational efficiency gets a major boost. FPIs can manage their liquidity more effectively. They avoid the need to maintain large cash balances for separate transactions.
The Indian market becomes more attractive to foreign investors. Simplified processes can encourage greater participation from global funds.
Current System vs. Proposed System
- Current System: Each buy and sell transaction requires separate fund and share transfers.
- Proposed System: Only the net difference between purchases and sales needs to be settled in funds.
Sebi's consultation paper on this matter is now open for public comments. Market participants have time to provide feedback before final implementation.
This initiative aligns with Sebi's ongoing efforts to modernize India's financial markets. It follows other recent reforms aimed at improving ease of doing business for investors.
The proposal specifically targets the cash market segment. It does not apply to derivatives or other market segments at this stage.
Industry experts have welcomed the move. They say it brings Indian practices closer to global standards. Many developed markets already use similar netting mechanisms for foreign investors.
