SEBI Mulls Net Settlement For Mutual Fund Equity Trades
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Mutual fund investments could get a cash-management boost if SEBI allows schemes to settle equity trades on a net basis. The proposal may reduce intraday funding needs for AMCs and follows a similar facility introduced for FPIs in April.
The Securities and Exchange Board of India (SEBI) is examining whether mutual fund schemes should be allowed to settle equity trades on a net basis. SEBI Chairman Tuhin Kanta Pandey discussed the proposal at the Association of Mutual Funds in India (AMFI) annual general meeting on Friday.
Asset management companies (AMCs) have sought a similar arrangement, saying it could make cash management easier when several equity transactions are taking place around the same time. The proposed change could also reduce the cash that mutual fund schemes need during the trading and settlement cycle and lower their reliance on intraday borrowing.
How Could Net Settlement Change Mutual Fund Trade Settlements?
Under the current gross-settlement approach, obligations from individual buy and sell transactions are settled separately. Net settlement would instead allow the obligations to be combined, with only the net amount settled.
For mutual fund schemes, this could lower the liquidity required during the settlement cycle. It may also reduce the need for AMCs to arrange short-term funds within the day.
The proposal follows requests from AMCs for a system similar to the one already available to foreign portfolio investors (FPIs). Their argument is that net settlement could make cash management easier, particularly when several equity transactions are taking place around the same time.
For investors making mutual fund investments, the proposal concerns the way schemes settle their market transactions. It does not change the basic process through which investors buy or redeem mutual fund units.
Why Is SEBI Considering Net Settlement For Mutual Funds Now?
SEBI introduced net settlement for FPIs in April after representations from foreign investors and custodians. They had raised concerns that gross settlement was putting pressure on liquidity and increasing funding costs.
Foreign exchange slippages and other operational issues could add to those pressures. The impact can be more pronounced during periods such as index rebalancing, when trading activity can rise sharply.
AMCs are now seeking a similar arrangement for mutual funds. The proposed framework could reduce their intraday borrowing needs and ease the amount of cash they have to keep available for equity trade settlements.
SEBI is also reviewing other parts of the asset management framework.
What Else Is SEBI Reviewing In The Mutual Fund Industry?
The regulator is separately examining the framework for mutual fund distributors. A working group is looking at ways to address the regulatory overlap between mutual fund distributors and investment advisers.
The reviews come as the mutual fund industry has expanded in scale and become more complex.
SEBI Chairman stressed that AMCs must uphold their fiduciary responsibilities across their operations. This includes investment decisions, valuation, distribution, disclosures and investor servicing.
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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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