SEBI’s New Circular: According to SEBI, many times mutual fund schemes have to make redemption payments to investors, while the amount due to the scheme arrives by late evening on the same day.
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SEBI’s New Circular: Market regulator Securities and Exchange Board of India (SEBI) has taken a significant step for the mutual fund industry. The regulator has issued a new circular allowing mutual funds to practice intraday borrowing. This rule will come into effect on April 1, 2026. This decision aims to streamline investor redemption payments and address temporary cash mismatches in mutual fund schemes.
According to SEBI, mutual fund schemes often have to make redemption payments to investors, while the funds received by the scheme arrive late that day. In such cases, fund houses can temporarily bridge this gap through intraday borrowing. The new rules formalize this entire process, ensuring more transparent and systematic mutual fund operations.
What is SEBI’s new rule?
In a circular issued on March 13, SEBI stated that mutual funds will be allowed to use intraday borrowing to address temporary cash flow mismatches. This borrowing will only be accepted and repaid within the same day.
The regulator states that this arrangement is particularly useful when redemption payments are made to investors in the morning, while the scheme receives the proceeds in the evening. In such cases, fund houses can borrow funds for a short period and make payments to investors.
For what purposes will intraday borrowing be allowed?
According to the new rules, mutual funds will be able to use intraday borrowing only for limited purposes. This primarily includes investor redemption payments, unit repurchases, and IDCW (Income Distribution cum Capital Withdrawal) payments.
SEBI has clarified that this facility is only for meeting temporary cash needs and cannot be used for any other purpose.
Funds can be borrowed only within a prescribed limit
Under the new framework, mutual funds will be able to borrow intraday funds only up to an amount that is guaranteed to be received on the same day. These guaranteed receivables will include various sources.
Proceeds from the maturity of TREPS transactions, proceeds from reverse repos, maturity payments on government securities, and proceeds from treasury bills or state development loans will also be included in this limit.
AMCs must formulate a clear policy
SEBI has also stated that every asset management company (AMC) must develop a clear policy for the use of intraday borrowing. This policy must be approved by the company’s board and trustees.
Besides, it will also be necessary to upload this policy publicly on the company’s website, so that investors can get complete information about it.
Borrowing expenses will not be passed on to the scheme.
The regulator has clarified that no expenses related to intraday borrowing will be passed on to the mutual fund scheme. The asset management company will bear the entire cost. If, for any reason, the expected funds are not received on time or there is a loss, the AMC will be responsible for it.
Regulations for ETFs and Index Funds
SEBI has also clarified borrowing rules for equity-based index funds and exchange-traded funds (ETFs). These funds will only be allowed to borrow to participate in the closing auction session of the stock exchange. According to the regulator, this closing auction session will come into effect from August 3, 2026.
Step taken in the interest of investors
SEBI states that this circular has been issued to protect investors’ interests and streamline mutual fund operations. This will help fund houses manage cash flow and ensure timely payments to investors.
According to experts, this move is expected to improve both transparency and operational efficiency in the mutual fund industry. It could also be beneficial for investors as it will reduce the likelihood of delays in redemption payments.
