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India's proposals for same-day settlement of securities trades will be costly for offshore funds and could fragment the market, according to a lobby group for the funds.

The Securities and Exchange Board of India (SEBI) last month proposed a phased rollout of optional same-day settlement and sought views from the public before it finalised the rules. It believes same-day settlement could benefit retail investors as well as reduce margin requirements and default risks.

However, two sources with direct knowledge of the matter told Reuters in October that offshore funds feared the plan could cost them more money and entail foreign exchange risk, as they would have to buy rupees ahead of time in order to settle trades immediately.

In its submission to the regulator, published on its website, the Asia Securities Industry and Financial Markets Association (ASIFMA) also warned optional same-day settlement could fragment the market.

It added that if the SEBI's ultimate goal was to move the whole market to same-day settlement, it would be better to focus on how it could do this with the least amount of disruption and cost to the market.

The SEBI did not immediately respond to an email seeking comment.

As a possible solution, ASIFMA asked the SEBI to consider China's same day settlement systems, which allow offshore investors flexibility in funding trades.