The Securities and Exchange Board of India (SEBI) has announced its decision to implement closing auction sessions for the equity cash segment through a phased rollout approach. This regulatory initiative marks a significant development in the Indian equity market structure, aimed at enhancing price discovery and market efficiency during closing hours.

Implementation Strategy

SEBI's decision to adopt a phased implementation strategy demonstrates the regulator's cautious approach toward introducing new trading mechanisms. The closing auction sessions will be gradually rolled out across the equity cash segment, allowing market participants to adapt to the new system while ensuring minimal disruption to existing trading operations.

Market Structure Enhancement

The introduction of closing auction sessions represents SEBI's ongoing efforts to strengthen the Indian equity market infrastructure. These sessions are designed to improve the price discovery process during market closing hours, potentially reducing volatility and providing better closing prices for securities traded in the equity cash segment.

Regulatory Framework

This initiative aligns with SEBI's broader mandate to enhance market transparency and efficiency. The phased rollout approach allows the regulator to monitor the implementation process closely and make necessary adjustments based on market feedback and operational requirements. The closing auction mechanism is expected to provide additional trading opportunities while maintaining orderly market conditions.

The Securities and Exchange Board of India (Sebi) has proposed permitting netting of funds for cash market transactions by Foreign Portfolio Investors (FPIs), a move aimed at reducing funding costs and improving operational efficiency, particularly during high-volume trading days such as index rebalancing. The regulator has invited public comments until February 6, 2026.

Current Settlement Framework Challenges

Under the existing system, FPIs are required to bring in full funds for purchases irrespective of sales on the same day, even though custodians eventually settle their obligations with clearing corporations on a net basis. This results in higher liquidity requirements and funding costs for investors, often leaving FPIs "underinvested" for at least a day.

Sebi illustrated the problem with an example: "Suppose an FPI has purchased stock A worth ₹100.00 crore and sold stock B worth ₹100.00 crore. The FPI would still need to make available ₹100.00 crore towards the purchase," adding that the amount could otherwise have been adjusted against sale proceeds. The issue becomes more pronounced during index rebalancing, when FPIs typically see large simultaneous inflows and outflows, with funding costs increasing significantly.

Proposed Netting Mechanism

Under the proposal, FPIs would be allowed to use sale proceeds from cash market transactions on a given day to fund purchases executed on the same day, thereby meeting only their net fund obligation instead of settling all trades on a gross basis. The proposed netting of funds refers to using proceeds from sale transactions to fund purchase transactions executed by an FPI on the same day.

The regulator has specified that only "outright" transactions, where an FPI has either a buy or a sell position in a security in a settlement cycle, but not both, will be eligible for fund netting. Trades involving both buy and sell positions in the same security will continue to be settled on a gross basis, effectively excluding intra-day round-tripping from the benefit.

Implementation Framework and Safeguards

Sebi has outlined specific scenarios for fund obligations. If the value of outright sell transactions does not exceed outright buy transactions, the residual amount, along with non-outright buy obligations, would be funded by the FPI. However, if outright sell value exceeds outright buy value, the excess outright sell amount would not be adjusted towards non-outright buy obligations.

The regulator acknowledged concerns raised by custodians and clearing corporations, including the risk of higher trade rejections and increased settlement risk. Sebi emphasized that robust safeguards already exist, stating: "Necessary safeguards by way of default waterfall mechanism, Core Settlement Guarantee Fund (Core SGF), etc., have been put in place." The regulator noted that netting could actually reduce the likelihood of fund-related trade rejections.

Market Impact and Regulatory Changes

Sebi clarified that securities settlement would continue on a gross basis between FPIs and custodians, ensuring that Securities Transaction Tax (STT) and stamp duty would continue to be charged on a delivery basis. There would be no change in the settlement process between custodians and clearing corporations.

The proposal will require amendments to regulatory frameworks issued by Sebi and the Reserve Bank of India, with custodians required to upgrade systems to support the new framework. If implemented, the regulator said the move would lower funding costs for FPIs without increasing market risk, as non-outright transactions would continue to be settled on a gross basis to prevent undue market influence.