SEBI Formalises Intra-Day Borrowings For Mutual Funds

Markets regulator, Securities and Exchange Board of India (SEBI), has permitted mutual funds to undertake intra-day borrowing from banks and other financial institutions to address temporary liquidity mismatches.

The new framework will come into effect from 1 April 2026. It has laid out the operational conditions and safeguards under which such borrowing can take place.

Borrowing Capped Above Existing Limits

Under current regulations, mutual funds can borrow up to 20% of a scheme’s net assets for a maximum period of six months to meet redemption requests, income distribution payments, or settlement obligations.

SEBI said that this cap will not be applicable to intraday borrowings if they meet specific conditions.

Why Liquidity Gaps Occur?

As per SEBI, mutual funds frequently face timing mismatches between redemption payouts and cash inflows from investments. Typically, redemption payments to investors are processed during the morning hours of the settlement day, which follows a T+1 cycle.

However, inflows from instruments such as treasury-backed transactions and short-term money market deals often arrive later in the evening. Because of this, asset management companies often rely on short-term funding arrangements with banks or financial institutions.

Limits On Quantum Of Borrowing

SEBI has imposed limits on the amount mutual funds can borrow during the day. The borrowing amount cannot exceed receivables that are guaranteed to be received on the same day from institutions such as the Government of India, the RBI and clearing corporations.

Eligible receivables to determine borrowing limits include:

• Maturity proceeds from TREPS transactions

• Reverse repo transactions

• Government securities

• Treasury bills

• State development loans

• Separate Trading of Registered Interest and Principal of Securities (STRIPS)

• Interest payments from these instruments

• The sale proceeds of these securities

Governance And Disclosure Requirements

To strengthen oversight, SEBI has mandated that each asset management company must put in place a formal policy governing intra-day borrowing. The policy must be approved by both:

• The board of the asset management company

• The board of trustees overseeing the mutual fund

The approved policy must also be disclosed on the asset management company’s website.

Also Read - Va Tech Wabag Wins Mega Chennai Water Project

Impact On The Mutual Fund Industry

The change gives fund houses some room to deal with temporary cash gaps during the day, especially in debt and liquid schemes where redemption requests can be large and settlement timings often differ. This move can help fund houses to meet redemption payouts or investor payments even when inflows from investments arrive later in the day.

Sources

The Economic Times

New Indian Express

ANI