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More Agility for Fund Managers
India's market regulator, Sebi, is proposing new rules to give mutual fund managers more operational flexibility. The proposal would allow intraday borrowing for more purposes than just paying investors who redeem their funds. Sebi recognizes that AMCs often face timing gaps between money going out and money coming in. Allowing funds to use intraday borrowing for settling trades, managing currency needs, and meeting derivative margins aims to make fund operations smoother and more efficient. This indicates Sebi believes strong cash flow tools are key for good portfolio performance, especially in today's complex markets. The proposal encourages a more flexible way to manage cash during the trading day.
Addressing Operational Issues
This follows an earlier Sebi proposal from March 13, initially planned for April 1, 2026. But it was delayed to July 15, 2026, after the Association of Mutual Funds in India (AMFI) and AMCs pointed out operational issues. The main problem is that trade payments are often due before the mutual fund receives its own money from sales or other inflows. Without flexible intraday borrowing, fund managers might struggle to buy or sell assets on time, possibly hurting fund returns or forcing them to sell assets quickly to meet obligations. The new rules aim to fix this by letting funds borrow intraday beyond guaranteed inflows, as long as the borrowing is repaid by the end of the trading day. This is a change from older rules that often limited intraday borrowing to money guaranteed from sources like the government or the central bank.
Balancing Flexibility and Oversight
While the proposed expansion offers more daily financial flexibility, it also increases the responsibility of AMCs to carefully manage their debts by the close of trading. Sebi stressed that any intraday borrowing that becomes overnight borrowing must follow current limits: up to 20% of a fund's net assets for up to six months, and only for approved reasons under Sebi (Mutual Funds) Regulations, 2026. Also, Sebi proposed that AMCs must cover any costs for using these intraday borrowings themselves, not pass them on to the fund or its investors. This ensures that managing liquidity doesn't hurt investor returns and keeps operational costs separate from fund expenses. Strict rules for overnight borrowing remain vital because that type of leverage carries more risk.
Background and Future Impact
This proposal follows a trend of Sebi gradually formalizing and protecting mutual fund operations. Sebi's rules for borrowing, including the 20% net asset limit for temporary needs, have aimed to ensure financial stability. The specific rule for intraday borrowing was added to Sebi (Mutual Funds) Regulations, 2026, on April 1, 2026, with guidelines on March 13. The delay showed the practical challenges of adding new cash management tools to current systems. By allowing more uses for intraday loans, Sebi is fixing current operational issues. It could also help trades execute more smoothly, reduce price swings from rushed selling, and support better use of capital across different investments.