The Securities and Exchange Board of India (SEBI) is preparing to introduce significant market reforms, with Chairman Tuhin Kanta Pandey announcing multiple initiatives at the regulator's annual conference, Samvad 2026. The developments signal major changes ahead for Indian capital markets, particularly benefiting foreign investors and improving market infrastructure.

Major Reform Announcements

SEBI is set to release a consultation paper that could make it easier for foreign portfolio investors (FPIs) to net their positions. "I think the consultation paper will be out very soon, maybe it is out today," Pandey said on the sidelines of the conference. Netting allows investors to offset their buy and sell positions against each other, requiring settlement of only the final difference instead of every single trade.

The Chairman also provided updates on the long-awaited closing auction session introduction. He confirmed that the proposal is at an advanced stage and could be announced shortly. This brief window at the end of trading days will match orders through an auction to discover more stable and transparent closing prices.

FPI Investment Landscape

Addressing concerns about foreign investor sentiment, Pandey emphasized that regulatory factors are not the primary driver of investment decisions. He noted that flows are influenced more significantly by returns, earnings growth, and global market conditions.

Pandey highlighted that India's market framework is already stable and accessible, with investor decisions driven by cross-market comparisons rather than regulatory barriers.

Corporate Bond Market Development

The SEBI Chairman outlined the current state and future plans for India's corporate bond market. Outstanding corporate bonds now stand at approximately ₹56.00 lakh crore, representing around 60.00% of bank credit to industry and services, up from about 40.00% a few years ago.

Registration and Process Improvements

SEBI is actively working to streamline FPI registration through digitization and reduced paperwork. The regulator has introduced the Single Window Automatic & Generalised Access for Trusted Foreign Investors (Swagat-FI) system, aimed at providing timeline clarity, utilizing digital signatures, and improving KYC coordination with the Reserve Bank of India.

"We are looking at registration, which is faster," Pandey stated, emphasizing the commitment to making Indian markets more accessible to international investors.

Collaborative Efforts

SEBI and RBI are working together on bond derivatives and other measures to improve market liquidity. The Chairman declined to comment on withholding tax and capital gains tax differences between equity and debt, citing the upcoming Union Budget and noting that such decisions rest with the finance ministry.

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.