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Wider Borrowing for Fund Operations
The Securities and Exchange Board of India (Sebi) is proposing to broaden the uses of intraday borrowing for mutual fund schemes. This regulatory change, prompted by industry feedback from the Association of Mutual Funds in India (AMFI), aims to give asset management companies (AMCs) better tools to manage their cash. Currently, intraday borrowing is mainly used for redemption payouts. The new proposal would allow AMCs to use these funds for trade settlements, foreign exchange needs, and derivative margin payments. This flexibility is intended to help fund managers deal with timing differences between when money comes into and goes out of a fund, making operations smoother and potentially boosting scheme returns.
Easing Settlement and Cash Flow Hurdles
This move directly addresses operational issues caused by timing differences between when payments are due and when funds are received. Sometimes, money coming into a fund late in the day cannot be used before payment deadlines, which can limit a fund manager's ability to trade efficiently on the same day. By allowing intraday borrowing for a wider range of needs, Sebi aims to ensure liquidity is available when needed for trading and other financial commitments, helping investment plans run without interruption. The regulator is also looking to relax rules that previously tied intraday borrowing only to guaranteed receivables.
Regulatory Timeline and Industry Input
Sebi has been adjusting its approach to mutual fund cash management over time. A specific allowance for intraday borrowing was included in the Sebi (Mutual Funds) Regulations, 2026, effective April 1, recognizing its importance. Initial operational guidelines were planned for March 13 but were delayed to July 15 following industry concerns about practical execution. This latest proposal represents a further refinement, acknowledging that the initial allowance did not fully cover all operational needs AMFI highlighted. Sebi is accepting public comments on the proposal until June 3.
Costs, Repayment Rules, and Safeguards
A key aspect of the proposal is that AMCs will be responsible for all costs associated with these borrowings. Furthermore, there is a strict requirement for all intraday borrowing to be repaid by the end of the trading day. These conditions are safeguards: they prevent borrowing costs from being passed on to investors, which could reduce returns, and ensure that short-term borrowing does not become a longer-term obligation. Any borrowing that extends beyond the day must also follow existing limits for overnight borrowing. While these measures aim to enhance efficiency, Sebi is also considering the need for clear operational controls to manage these expanded uses effectively, especially for smaller AMCs, to avoid potential complications.
Next Steps and Final Guidelines
Following the public comment period closing on June 3, Sebi will review the feedback. The regulator's final decision will determine how much new operational flexibility Indian mutual funds will gain. The industry is anticipating clarity on the final rules, which are expected to influence liquidity management practices going forward. The previously deferred operational guidance remains set for July 15.