SEBI Looks To Ease Intraday Borrowing Norms For Mutual Funds Beyond Redemptions

The Securities and Exchange Board of India (SEBI) on Wednesday floated a proposal to let mutual funds use intraday borrowing facilities more freely. The idea is to treat these short-term loans as a broader cash management tool, rather than restricting them only to paying out redemptions, as is the case currently.

SEBI has invited public comments on the proposal by 3 June 2026.

What Is Intraday Borrowing And Why It Matters

Mutual funds often run into a timing mismatch during the trading day. Money has to go out fairly early in the morning, whether for buying stocks and bonds, paying investors who have redeemed their units, settling foreign exchange transactions, or meeting mark-to-market (MTM) requirements on derivative positions. The money coming in, however, usually arrives later in the day, from things like trade pay-outs or maturing securities.

To bridge that gap, mutual funds take very short-term loans from banks, which they repay by the end of the same day using the incoming cash. This is what intraday borrowing is.

SEBI in its discussion paper noted that without this facility, fund managers would struggle with execution. Money received late in the evening cannot be deployed effectively, which could hit returns. It would also limit a fund manager's ability to carry out buy and sell trades within the same day.

What The Proposal Says

Currently, intraday borrowing is mainly allowed only for paying redemption money to investors, and that too against certain guaranteed sources of incoming cash. SEBI is now suggesting that mutual funds be allowed to use intraday borrowing for a wider set of purposes. These include settling forex and derivative trades, repaying existing borrowings, and other day-to-day operational cash needs.

The regulator is also looking at the possibility of allowing funds to borrow even when they do not yet have confirmed incoming receivables for the day.

According to a submission made by the Association of Mutual Funds in India (AMFI), the use of intraday borrowing has already evolved well beyond redemption payouts. Asset management companies are using it to manage trade settlement obligations, foreign exchange transactions, derivative-related payments, and servicing existing borrowings. AMFI has pitched it as a broader cash management tool.

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The Safeguards

Even with the relaxations on the table, SEBI has made it clear that intraday borrowing must be fully repaid within the same day. If not, it will be treated as regular borrowing, which comes with its own set of restrictions, including a cap of 20% of the fund's size and specific time limits. Any cost of borrowing will have to be borne by the fund house and not passed on to investors.

The regulator's view is that this change will help mutual funds manage their daily liquidity better, reduce the need to sell investments at short notice, and allow for smoother execution of trades. At the same time, SEBI has flagged that the facility must stay strictly short term, so it does not end up turning into excessive or risky borrowing that could compromise the stability of mutual fund operations.

Sources:

Economic Times

Moneycontrol