Whalesbook
More Flexibility for Fund Managers
India's market regulator, Sebi, is proposing new rules to give mutual fund managers more room to operate. The plan would allow funds to use money borrowed during the day for more purposes than just paying investors back when they redeem their shares. Sebi recognizes that funds often face delays between money going out and money coming in. Letting them use intraday borrowing for settling trades, managing foreign currency needs, and making margin payments on derivatives should make operations smoother and more efficient. This signals Sebi's understanding that good cash flow tools are vital for managing portfolios, especially in today's markets. It supports a more active way of handling money throughout the trading day.
Smoothing Out Operational Glitches
This proposal comes after Sebi issued a circular on March 13, with a planned start date of April 1, 2026. However, the effective date was pushed back to July 15, 2026, because the Association of Mutual Funds in India (AMFI) and several Asset Management Companies (AMCs) pointed out operational hurdles. The main issue is that money due for trade settlements often arrives after the payment deadline. Without enough borrowing flexibility during the day, fund managers can struggle to make timely trades. This could hurt fund performance or force them to sell assets quickly to meet payments. The new plan aims to close this gap. It would let intraday borrowing go beyond confirmed incoming cash, as long as it's paid back by the end of the day. Previously, borrowing was often limited to money guaranteed from sources like the government or the central bank.
Guardrails on Borrowing
While this change offers more daily financial flexibility, it also means AMCs must be more careful about managing their debt by the end of each day. Sebi clarified that if intraday borrowing continues into the next day (overnight borrowing), it must follow current rules: borrowing up to 20% of a scheme's net assets for up to six months, and only for approved purposes under Sebi (Mutual Funds) Regulations, 2026. Crucially, Sebi also proposed that any fees for using this intraday borrowing must be paid by the AMC itself, not charged to the mutual fund or its investors. This ensures that the cost of managing daily cash flow doesn't reduce investor returns. Strict limits on overnight borrowing remain, as longer-term borrowing involves greater risk.
A Step Towards Smoother Markets
This proposal is part of Sebi's ongoing efforts to improve and secure mutual fund operations. The general rule allowing borrowing up to 20% of net assets for short-term cash needs has been in place to maintain stability. The specific allowance for intraday borrowing was added in the Sebi (Mutual Funds) Regulations, 2026, taking effect April 1, 2026, with operational details shared on March 13. The earlier delay showed how tricky it can be to fit new cash tools into existing fund systems. By permitting wider use of intraday loans, Sebi aims to solve current operational problems. This could lead to smoother trade execution, less market swings from forced selling, and better use of capital across different types of investments.