Starting September 1, 2026, SEBI will allow mutual funds to use intraday borrowing for broader operational needs like mark-to-market settlements and investment pay-ins. This regulatory change aims to fix cash-flow gaps and improve settlement efficiency without increasing costs for individual investors, as the Asset Management Companies must cover any borrowing expenses themselves.
The Securities and Exchange Board of India (SEBI) has introduced a new framework to manage daily cash flow for mutual fund schemes, providing Asset Management Companies (AMCs) with more flexibility. Effective September 1, 2026, these rules allow mutual funds to borrow funds on an intraday basis for several operational requirements beyond just processing investor redemptions.
Expanding Operational Flexibility
Previously, intraday borrowing was primarily focused on meeting redemption requests from unitholders. Under the updated regulations, AMCs can now secure intraday loans to fulfill pay-in obligations when purchasing securities, handle mark-to-market (MTM) margin requirements, and manage necessary foreign exchange settlements. Additionally, the new guidelines permit funds to borrow to repay existing intraday obligations. This shift is designed to address the timing differences between when a fund expects to receive cash—such as from secondary market sales or subscription inflows—and when it must make payments for trades.
Managing Market Settlement Risks
Mutual funds operate in a fast-paced environment where they may need to settle trades in equity or debt markets while waiting for funds from other transactions to clear. By allowing borrowing against both guaranteed inflows, such as those from the Reserve Bank of India or clearing corporations, and non-guaranteed inflows like maturity proceeds, SEBI is helping funds avoid settlement failures. These timing gaps often occur because different financial instruments have different settlement cycles. By bridging these gaps, the regulator aims to ensure that funds remain liquid and able to meet their obligations throughout the trading day.
Investor Safeguards and Costs
To prevent potential misuse, SEBI has implemented strict operational requirements. Every intraday loan must be fully repaid before the end of the trading day. If a borrowing is not repaid by the closing bell, it will be classified as an overnight loan, which must then adhere to existing, much stricter regulatory borrowing limits.
Importantly, SEBI has mandated that the financial burden of this process remains with the AMC. If an AMC incurs interest costs from intraday borrowing, or if it suffers losses due to anticipated receivables not arriving on time, these costs cannot be passed on to the mutual fund schemes or the investors. Furthermore, each AMC is required to create a formal, board-approved policy for these borrowings and must publish this policy on its public website. This transparency, combined with the rule that AMCs bear all related costs, is intended to prioritize investor protection while simultaneously improving the overall efficiency of the Indian mutual fund settlement process. Investors should monitor how effectively different AMCs manage these liquidity gaps once the rules take effect in September.