The Securities and Exchange Board of India (SEBI) has released a consultation paper proposing to allow Foreign Portfolio Investors (FPIs) to net their cash obligations for stock market transactions. This regulatory reform, announced on January 16, aims to enhance operational efficiency and reduce funding costs, particularly during high-volume trading periods such as index rebalancing days.

Consultation Paper Framework

The proposal comes amid significant foreign investor outflows, with Foreign Institutional Investors (FIIs) selling $21.00 billion worth of equities since the beginning of 2025. SEBI has invited public comments on the proposal until February 6 before making a final decision.

Current Settlement Challenges

Under the existing framework, FPIs face operational constraints that increase funding requirements and costs. Currently, all cash market trades must be settled on a gross basis at the custodian level, even when buy and sell positions offset each other on the same trading day.

While custodians eventually settle with clearing corporations on a net basis, FPIs must bring in full funds for purchases and deliver securities for sales separately. This creates higher temporary liquidity requirements and exposes investors to additional costs including forex conversion slippage and short-term funding expenses.

Proposed Netting Framework

SEBI's proposal would permit "netting of funds" for outright buy and sell transactions carried out by FPIs in the cash market on the same settlement day. Under this framework, sale proceeds could be adjusted against purchase obligations, requiring FPIs to fund only the net cash amount.

However, trades where investors both buy and sell the same security within the same settlement cycle will continue to be settled on a gross basis, maintaining existing risk controls.

Implementation Considerations

SEBI acknowledged potential operational risks highlighted by market participants, including higher chances of trade rejection and increased settlement risk for custodians. Concerns were also raised about system readiness during peak trading days and the absence of margin collection for FPI cash market trades.

To address these concerns, SEBI pointed to India's robust clearing system safeguards, including default waterfall mechanisms and core settlement guarantee funds. Custodians would be required to upgrade their systems to handle the proposed netting process, while settlement between custodians and clearing corporations would continue on the current net basis.

SEBI clarified that the proposed changes are designed to reduce funding stress without increasing systemic risk or enabling excessive intra-day trading by FPIs, maintaining the regulatory framework's integrity while improving operational efficiency.

Securities and Exchange Board of India (Sebi) has announced enhanced disclosure standards for initial public offerings, with chairman Tuhin Kanta Pandey emphasizing stricter transparency requirements during a recent industry event. The new guidelines aim to improve the quality of IPO documentation and strengthen investor protection mechanisms.

Enhanced Disclosure Requirements

Issuers must now provide comprehensive capital structure disclosures that clearly explain past capital-raising activities, preferential allotments, and any changes in control occurring close to the IPO timeline. Pandey stressed the importance of greater business model clarity, requiring transparent presentation of revenue and cost drivers.

The management discussion and analysis sections must move beyond basic narration to provide detailed explanations of both internal and external performance drivers. This shift represents a significant enhancement in the depth of information required from IPO applicants.

Strengthened Due Diligence Standards

Sebi's inspections have revealed concerning gaps in current due diligence practices. Pandey noted that due diligence processes are not always independent and frequently rely heavily on issuer undertakings rather than independent verification.

The new requirements mandate independent verification of projections, particularly for working capital and capital expenditure estimates. Investment bankers must maintain comprehensive backup documentation for all material statements included in IPO documents.

Market Performance and Pipeline

India continues to demonstrate strong IPO market performance, maintaining its global leadership position. The country ranks first worldwide in terms of IPO numbers and third in terms of fundraising value.

Sebi's internal estimates indicate a robust fundraising pipeline, with potential for issuers to raise an additional ₹1.50 lakh crore in upcoming offerings.

Valuation Concerns and Market Dynamics

Pandey highlighted significant concerns regarding valuation mismatches between unlisted share markets and IPO book-building processes. The disparity between pricing in unlisted markets and prices discovered during formal IPO procedures represents a key regulatory challenge.

The chairman acknowledged that pre-listing and post-listing environments operate as "different worlds," with substantial numbers of unlisted companies requiring regulatory attention. Sebi plans to explore solutions in consultation with the Ministry of Corporate Affairs.

NSE Settlement Development

In a separate announcement, Pandey confirmed that Sebi has agreed in principle to the National Stock Exchange's settlement application related to the co-location case. The settlement process is currently under review by various regulatory committees.

NSE had filed two applications in June 2025 to settle the long-standing co-location and dark fiber cases, offering to pay over ₹1,300 crore. The regulator indicated it expects to issue a no-objection certificate for the NSE IPO by month-end, marking progress in resolving these regulatory matters.