MUMBAI, April 4 -- Indian custodians are preparing for operational disruption after Securities and Exchange Board of India (Sebi) approved a shift to net settlement of trades for foreign portfolio investors (FPIs), pressing ahead despite industry calls to make the change optional. The move, cleared at Sebi's March board meeting, allows FPIs to settle funds on a net basis in the cash market, replacing the system where each leg of a transaction is settled separately. The change is aimed at reducing funding costs and aligning India with global practices, but intermediaries warn it could strain systems and workflows. Some industry participants have also questioned the timing amid volatile global conditions. Under the current gross settlement system, FPIs must fund each transaction independently. If an investor buys and sells Rs.100 crore worth of stocks, it must bring in funds for the purchase and separately deliver the sale, even if the net cash position is zero. Netting removes that inefficiency by offsetting obligations. In the same example, the proceeds from the sale can be used to fund the purchase, eliminating the need to bring in Rs.100 crore. It also compresses timelines within the settlement chain, requiring trades to be confirmed by evening for settlement the next morning, leaving less room for late changes. "Recognizing these concerns, and with a view to enhancing operational efficiency and reducing cost of funding for FPIs, it has been decided to permit net settlement of funds for outright transactions done by FPIs in cash market, i.e., transactions in which there is either purchase or sale transactions, but not both, in a security in a settlement cycle," Sebi said in a press release following its March board meeting. But custodians, who sit at the centre of trade execution and settlement, say the shift introduces operational complexity in a market where trades flow through multiple layers of global and local intermediaries. "It may not be a great time to implement netting right now due to the geopolitical tensions. FPIs may become cautious due to so many changes being implemented by custodians at such a volatile time. But, the regulator is of the view that though the changes might take some time, it is the need of the hour," said Utkarsh Singh, senior manager, custody business development at SBI-SG Global Securities Services. FPI trades are routed via a global custodian and a local custodian, before being processed via depositories and clearing corporations. Custodians have flagged difficulties in accommodating late trade changes, common for FPIs operating across time zones, once positions are netted. "There will be business implications on custodians as a lot of churning will happen during a day. FIIs may make changes to trades based on time zones, which is late at night for us...making it difficult for custodians to make changes at the last minute when trades are netted." Singh said 60-70% of FPIs route their trades through a global custodian. "Custodians prefer gross settlement as netting across FPIs would make the system inefficient for GCs. Some custodians have done digitisation to maintain a robust system. Those who don't have it will face a problem," an industry participant said seeking anonymity. The operational burden extends beyond timelines to system changes and client coordination. "Custodians are saying that the new norms should not be made compulsory as tax and netting will create confusion. If Rs.100 is sold and Rs.55 bought, only Rs.45 will be paid to investors. If tax is Rs.6, then Rs.39 will be paid. In essence, when crores worth of money are involved, it is complicated to explain to a global custodian," said a member of a clearing corporation requesting anonymity. "Global custodians have to change their systems. They have to offer settlement on net and gross basis. These changes will take some time," he said. The concerns were flagged to a Sebi-constituted working group months before the proposal was finalized, but the board approved the framework....