Mumbai, March 23 The Securities and Exchange Board of India (SEBI) board on Monday decided to allow foreign portfolio investors (FPIs) to net funds for same-day cash market trades, instead of settling each trade individually, a move aimed at enhancing operational efficiency and reducing their funding costs, especially on index rebalancing days.
The proposal will be implemented by December 31, 2026, the regulator said in a statement after the conclusion of its board meeting.
Additionally, the board approved amendments to the regulations governing Alternative Investment Funds (AIFs), reducing the minimum investment value by individual investors in the Social Impact Fund of the AIF from the existing Rs 2 lakh to Rs 1,000 to boost retail participation.
Also, the board decided to allow AIFs to retain limited funds beyond the scheme's life to ease the winding-up process and facilitate the surrender of registration.
Regarding FPI settlement rules, SEBI said that currently, FPIs settle their transactions with custodians on a gross basis, which results in additional costs for FPIs, including funding costs and foreign exchange slippages.
Recognizing these concerns and with a view to enhancing operational efficiency and reducing the cost of funding for FPIs, it has been decided to permit net settlement of funds for outright transactions done by FPIs in the cash market, i.e., transactions in which there is either a purchase or sale transaction, but not both, in a security within a settlement cycle, SEBI said.
Netting of funds refers to using the proceeds of sale transactions in the cash market on a particular day to fund the purchase transactions done by an FPI on the same day, thereby requiring the FPI to fulfil only the net fund obligation.
"The proposal is expected to reduce the cost of funding for FPIs, particularly on index rebalancing days, when outright purchases and sales occur in incoming and outgoing index constituents, respectively," SEBI said.
Since non-outright transactions will continue to be confirmed and settled on a gross basis, concerns relating to potential market influence arising from large FPI positions or speculative trading activity are allayed.
The regulator clarified that settlement of securities would continue to be carried out on a gross basis between the FPI and the custodian. Also, Securities Transaction Tax (STT) and stamp duty will continue to be levied on a delivery basis, as applicable.
Meanwhile, the board approved amendments to AIF norms, whereby it reduced the minimum investment value by individual investors in the Social Impact Fund of the AIF from the existing Rs 2 lakh to Rs 1,000.
This would align the requirement of minimum application size for subscribing to Zero Coupon Zero Principle Instruments under the Sebi (Issue of Capital and Disclosure Requirements) Regulations, 2018, and the requirement of minimum value of investment by individual investors in Social Impact Fund, thereby facilitating wider retail participation on the Social Stock Exchange.
Additionally, SEBI has cleared a proposal allowing alternative investment funds (AIFs) to retain limited funds beyond scheme life to ease the winding-up process and facilitate the surrender of registration.
It has also been approved to introduce a framework for tagging certain AIFs as 'inoperative funds' with lighter compliance requirements till surrender of their registration certificate.
Under the current framework, AIFs are required to distribute the liquidation proceeds to investors within the permissible fund life and achieve a "nil" bank account balance before surrendering their certificate of registration.
SEBI observed that certain AIFs that retain funds beyond this period, on account of pending or anticipated tax or litigation demands or residual operational expenses, are unable to satisfy this requirement. Thus, they are constrained to continue holding the AIF registration and are required to comply with the attendant requirements, even when there is no active fund management.
To address these issues, AIFs will be permitted to retain proceeds beyond the permissible fund life if they satisfy one of the conditions. These include obtaining consent from at least 75 per cent of investors by value in cases where potential liabilities may arise due to litigation or tax demands; demonstrable receipt of a litigation notice or tax/regulatory demand; and substantiation of amounts retained for operational expenses through invoices or prior-year comparables.
SEBI said that AIFs intending to surrender their registration and having one or more such schemes shall be tagged as ‘inoperative funds’. The compliance requirements for such funds will be less stringent than for other AIFs, including the discontinuation of periodic filings, PPM updates, and performance benchmarking.
SEBI said these measures are expected to reduce the compliance burden on AIFs with no active fund management activity while retaining necessary regulatory oversight.
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