Whalesbook
Sebi Considers Broader Intraday Borrowing for Mutual Funds
Sebi is consulting on letting mutual funds use intraday borrowing for more purposes. This change, backed by AMFI, aims to give asset management companies (AMCs) better tools for managing cash. Currently, this borrowing is mainly for paying out investor redemptions. Sebi now wants to allow it for trade settlements, foreign exchange needs, and derivative margin payments. This shift should give fund managers more flexibility to make investment decisions and handle timing gaps between cash coming in and going out.
Addressing Settlement Timing Gaps
The proposal addresses operational issues caused by differences in payment deadlines and fund receipts. Right now, funds received late in the day can't always be used efficiently, especially when payments are due before strict deadlines. This can stop fund managers from making same-day trades, which might hurt scheme performance. By allowing intraday borrowing for more needs, Sebi wants to fix these operational hitches. This ensures liquidity is there when needed for trading and financial commitments, without disrupting investment strategies. Sebi also wants to ease rules that limited such borrowing to only guaranteed receivables, adding more flexibility.
Boosting Operational Efficiency
These proposed changes mark a significant step in making mutual fund operations smoother. Allowing borrowing for forex and derivative margins means AMCs can manage cash better without keeping large cash reserves that aren't earning returns. This flexibility is key in volatile markets, where derivative margin calls can appear suddenly and be large. Additionally, borrowing for trade settlements helps ensure trades go through, avoiding failures due to short-term cash shortages that could harm market confidence and fund performance.
Regulatory Background
Sebi's approach to managing mutual fund liquidity has evolved over time. A specific allowance for intraday borrowing was added to the Sebi (Mutual Funds) Regulations, 2026, effective April 1, recognizing its growing importance. Operational guidelines were issued on March 13, but their start date was moved to July 15 after the industry raised concerns about practical challenges. This new proposal is a further step, recognizing that the initial rules didn't cover all the operational needs AMFI had identified. Sebi's openness to public comments until June 3 shows its adaptive strategy for developing market infrastructure.
Potential Risks and Safeguards
While the changes aim to improve operations, some risks need careful review. A main worry is greater dependence on borrowed money. Sebi requires all intraday borrowing to be repaid by day's end, but there's still a possibility of AMCs misusing or mismanaging the facility. Any overnight borrowing must follow existing limits, with the AMC solely responsible for repayment. The proposal also clearly states that AMCs, not the mutual fund schemes, must pay any borrowing costs. This is a key protection to stop AMCs from charging investors for their borrowing tools, which could lower investment returns. However, if an AMC faces serious financial trouble, meeting daily repayment deadlines could create broader market risks, especially if many firms can't get intraday credit at once. The lack of detailed controls for these new borrowing uses beyond redemptions might create unexpected issues in managing short-term cash, particularly for smaller AMCs with weaker treasury operations.
Next Steps
After public comments close on June 3, Sebi will review the feedback. Sebi's final decision will shape how much enhanced operational flexibility Indian mutual funds will gain. The industry is waiting for the final rules, which are expected to guide liquidity management for years to come. The earlier operational guidance remains deferred until July 15.