SEBI’s Proposal to Provide More Freedom to Mutual Funds in Daily Cash Flow Management

The Securities and Exchange Board of India is working on an expansion of intraday borrowing regulations for mutual funds by enabling fund management companies to take advantage of borrowing opportunities for various reasons other than investor withdrawals.

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The regulator issued a discussion paper on May 13 and solicited comments from the public on the proposal until June 3, 2026.

Changes in Intraday Borrowing Regulations

Intraday borrowing provides mutual funds with the opportunity to raise funds and repay the borrowed money on the same day of trade.The facility is currently used mainly against guaranteed receivables linked to institutions such as the Government of India, the Reserve Bank of India, and the Clearing Corporation of India Limited.

Under the new proposal, mutual funds may also use intraday borrowing for trade settlements, foreign exchange obligations, and derivative margin payments.

SEBI said the move is aimed at helping asset management companies manage timing differences between outgoing payments and incoming settlement receipts during the trading day.

The regulator has also proposed permitting mutual funds to borrow during the day even when expected inflows are not fully guaranteed or have not yet been credited.

Settlement Timing Gaps Behind Proposal

The proposal follows representations made by the Association of Mutual Funds in India regarding settlement mismatches across asset classes and markets.

Mutual funds often receive proceeds from debt sales, overseas investments or other settlements later in the day, while payment obligations for equity purchases or margin requirements may arise earlier.

According to SEBI’s consultation paper, these timing gaps can force fund managers to maintain larger cash balances instead of deploying funds into investments.

Impact On Mutual Fund Operations

Praveen Shankaran, Chief Operating Officer at KFin Technologies, said the proposal is intended to address settlement cut-off differences rather than operational inefficiencies.

He stated that intraday borrowing may reduce the need for mutual funds to hold unused cash for liquidity purposes. According to him, this could allow a larger portion of investor money to remain invested in portfolios.

The proposal may also support operational flexibility in derivative transactions because fund houses would not need to separately maintain additional liquidity for margin obligations.

SEBI said any borrowing extending beyond the same trading day would be classified as overnight borrowing and must remain within the existing regulatory cap of 20% of a scheme’s net assets.

Risks Linked To Settlement Delays

The consultation paper also highlighted risks related to settlement failures and delayed inflows.

According to Shankaran, operational disruptions or counterparty failures could create repayment pressure if intraday borrowings are not closed within the trading day.

SEBI has proposed that borrowing-related costs should continue to be borne by asset management companies instead of investors.

For hybrid or multi-asset fund schemes, the proposed idea would be even more advantageous in terms of operations, as their dealings include various settlement periods related to equities, fixed income, derivatives, and foreign assets.