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More Flexibility for Fund Managers
India's market regulator, Sebi, is proposing new rules to give mutual fund managers more operational freedom. The plan would allow funds to use money borrowed during the day for more purposes than just paying back investors. Sebi understands that fund managers often struggle with timing differences between when money leaves a fund and when it comes in. Letting funds borrow intraday for things like settling trades, handling foreign currency needs, and meeting margin payments for derivatives would make operations smoother. This shows Sebi believes good cash flow tools are vital for managing portfolios well, especially in today's complex markets. The proposal encourages a more active way to manage money during trading hours.
Solving Cash Flow Timing Issues
This proposal follows a previous attempt by Sebi announced on March 13, which was meant to start on April 1, 2026. However, it was postponed to July 15, 2026, after the Association of Mutual Funds in India (AMFI) and other fund companies pointed out operational difficulties. The main issue is that trades often need to be paid for before the fund's expected money from investors actually arrives later in the day. Without better intraday borrowing options, fund managers can find it hard to make timely buy and sell decisions. This could affect fund performance or even force them to sell assets quickly to meet obligations. The new proposal aims to fix this by allowing intraday borrowings to go beyond guaranteed incoming funds, as long as the borrowed money is paid back by the end of the trading day. This is a change from older rules that often limited such borrowing to money guaranteed from sources like the government.
Balancing Freedom with Responsibility
While the planned increase in intraday borrowing offers more financial agility during the day, it also places greater responsibility on fund management companies (AMCs) to carefully manage their debts by the end of each day. Sebi has stressed that any intraday borrowing that carries over into overnight borrowing must follow existing rules. These rules allow borrowing up to 20% of a scheme's net assets for up to six months and only for approved purposes under Sebi regulations. Importantly, the regulator proposed that any costs or fees for these intraday borrowings must be paid directly by the AMC, not passed on to the mutual fund scheme or its investors. This ensures that the cost of better cash flow management doesn't hurt investor returns. Strict limits on overnight borrowing remain in place because longer-term borrowing carries more risk.
Background and What's Next
This latest proposal is part of Sebi's ongoing efforts to improve and secure mutual fund operations. Sebi's framework for borrowing, including the general 20% net asset limit for temporary needs, has been in place to ensure financial stability. The specific provision for intraday borrowing was added in April 2026, with operational details issued in March. The delay highlighted the practical challenges of fitting new cash flow tools into existing systems. By allowing wider use of intraday loans, Sebi is not just trying to solve immediate operational problems. It could also help trades settle more smoothly, reduce price swings caused by forced selling during the day, and ultimately lead to more efficient use of capital across different investments.