SEBI Eases Intraday Borrowing Norms For Mutual Funds

Mutual funds in India can now tap intraday borrowing from banks for a significantly wider range of purposes than before. The Securities and Exchange Board of India (SEBI) approved changes to the framework, responding to industry feedback that the earlier redemption-focused structure was creating unnecessary friction in day-to-day fund operations.

The old setup allowed asset management companies to borrow intraday mainly to pay out redemptions, interest and Income Distribution-cum-Capital Withdrawal (IDCW) obligations. The amount they could borrow was capped by guaranteed receivables due on the same day from entities like the government, the Reserve Bank of India and clearing corporations.

In practice, this left fund managers in a bind whenever settlement obligations fell due in the morning but corresponding inflows arrived only later in the day.

What Is Now Allowed

The revised framework expands both the permitted uses of intraday borrowings and the cash flows that can be considered while determining borrowing limits.

Permitted uses now include:

• Securities trade settlements.

• Foreign exchange transactions.

• Mark-to-market payments on derivative positions.

• Repayment of existing borrowings.

• General cash flow management across daily settlement cycles.

Cash flows that can now be considered for borrowing limits include:

• Proceeds from secondary market sales.

• Maturity receipts.

• Other settlement-related inflows that are expected but not formally guaranteed.

The Rules That Stay

Two safeguards remain firmly in place. Every rupee borrowed intraday must be repaid before the trading day ends. Any amount that spills over becomes regular borrowing and must comply with the existing mutual fund borrowing limits. The cost of using the facility, including any loss from delays in receiving expected cash, stays with the asset management company and cannot be charged to investors in the scheme.

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Why The Industry Pushed For This

The Association of Mutual Funds in India had taken the problem to the regulator, pointing out that fund houses routinely face situations where outflows hit early in the day and inflows land later.

The Securities and Exchange Board of India acknowledged that restricting intraday borrowing to guaranteed receivables was reducing operational flexibility and could hurt returns.

Sources:

The Hindu Businessline

Newsonair