SEBI proposes net settlement to ease liquidity pressure on Mutual Funds

The Securities and Exchange Board of India (SEBI) has proposed allowing mutual fund schemes to settle their cash obligations from stock market transactions on a net basis. 

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The move is aimed at reducing the amount of cash mutual funds need to keep ready when they are buying and selling shares during the same settlement cycle. The proposal comes at a time when fund houses can face temporary liquidity pressure during periods of heavy trading activity. 

Under the proposed system, a mutual fund scheme would be allowed to offset its outright purchases against outright sales across different securities during the same settlement cycle. Instead of arranging funds for the full value of purchases, the scheme would only have to settle the net cash obligation. 

For instance, if a scheme buys shares worth Rs 100 crore and sells shares worth Rs 70 crore during the same settlement cycle, the fund would need to arrange cash only for the net Rs 30 crore obligation. 

The securities themselves would continue to be settled on a gross delivery basis. 

The proposal is part of SEBI’s efforts to make it easier for mutual funds to manage temporary cash requirements arising from their market transactions. At present, fund houses may need to arrange liquidity even when their purchase and sale transactions broadly offset each other. 

This can become more noticeable during events such as index rebalancing, when fund managers may have to make large changes to their portfolios within a short period. 

SEBI’s proposal would allow netting at the scheme level. Transactions between different schemes would not be netted against each other. 

The regulator has also said that the proposed arrangement would continue to maintain delivery-based settlement of securities. 

SEBI has asked the Association of Mutual Funds in India (AMFI) to work with market participants, including stock exchanges and custodians, to work out the operational framework for implementing the proposal. 

Stakeholders have been invited to submit their comments on the proposal by September 24. 

The proposal follows a similar move for foreign portfolio investors, who were allowed to use net settlement for certain cash-market transactions earlier this year. 

For mutual funds, the change could reduce the amount of funds that need to be arranged for settling trades and make day-to-day liquidity management easier, particularly when trading volumes rise sharply.