SEBI Proposes Net Settlement For Mutual Funds To Ease Liquidity Pressure
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SEBI has proposed allowing mutual fund schemes to settle eligible cash-market trades on a net basis, which could reduce temporary funding needs and make settlements more efficient.
The Securities and Exchange Board of India (SEBI) has proposed allowing mutual fund schemes to settle certain cash-market transactions on a net basis. The regulator issued a consultation paper on 3 September and has invited public comments until 24 September 2026.
At present, schemes have to meet purchase and sale obligations separately. This can leave funds needing to arrange money for purchases even when they are due to receive proceeds from sales in the same settlement cycle.
Under the proposed system, eligible transactions could be offset to arrive at a single net cash obligation.
How Would Net Settlement Work?
For example, if a mutual fund buys securities worth ₹100 crore and sells securities worth ₹90 crore in the same settlement cycle, it would currently need to fund the full ₹100 crore purchase separately. Under the proposal, its net cash requirement would be ₹10 crore.
The facility would apply only to outright transactions. A scheme could net purchases and sales across different securities, but buying and selling the same security during the same settlement cycle would not qualify.
Importantly, the proposal covers only fund settlement. Securities would continue to be settled on a gross, delivery-backed basis.
Why Does SEBI Want To Change The System?
SEBI said the existing process can create temporary liquidity pressure, operational inefficiencies and a need for short-term funding.
The impact can be more noticeable when passive funds make large portfolio changes during index rebalancing or when schemes face heavy subscriptions and redemptions.
The proposed change could therefore reduce the amount of intraday borrowing required to meet settlement obligations.
What Does The Proposal Mean For Mutual Fund Investors?
Netting would be restricted to each individual mutual fund scheme. Obligations cannot be adjusted between different schemes of the same asset management company.
AMCs and custodians would also have to ensure that the change does not affect scheme-level accounting, daily NAV calculations, asset segregation or investment limits.
SEBI said the proposal follows its April decision to permit a similar facility for foreign portfolio investors. If implemented, the Association of Mutual Funds in India will work with market infrastructure institutions and custodians on standards covering reconciliation, reporting, rejected trades and audit trails.
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This article is for informational purposes only and should not be considered investment advice from Kotak Neo. For compliance T&C and disclaimers, Visit www.kotakneo.com/disclaimer
Vishwa has spent 10+ years across fintech and FMCG doing what most people miss, connecting the dots, catching trends before they trend, and finding the angle nobody else thought to ask about.
At Kotak Neo, she drives content strategy for neoshorts, Kotak News Desk, and Investing Guide, turning market noise into something worth reading.
When she's not decoding markets, she trades charts for canvases, chasing art, painting, and architecture across cities she's yet to explore.
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