SEBI allows intraday borrowing for mutual funds to bridge liquidity gaps; new framework from Sept 1

The Securities and Exchange Board of India (SEBI) has allowed mutual funds to avail intraday borrowing facilities to address temporary liquidity mismatches arising from differences in market settlement timings, a move aimed at ensuring smoother fund operations and timely payouts to investors.

In a circular issued on July 10, the capital markets regulator said the new framework will come into effect from September 1, 2026. The move follows amendments to the SEBI (Mutual Funds) Regulations, 2026, notified earlier this month, replacing the existing borrowing guidelines under the SEBI Master Circular for Mutual Funds.

The regulator said the facility has been introduced to help mutual funds efficiently manage short-term cash flow mismatches without affecting investors or disrupting settlement obligations.

What can intraday borrowing be used for?

Under the revised framework, mutual funds can use intraday borrowing for a range of operational purposes. These include making payments to investors such as redemption proceeds, Income Distribution-cum-Capital Withdrawal (IDCW) payouts and interest payments.

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The facility can also be used to meet pay-in obligations arising from investments made by schemes, settle mark-to-market (MTM) obligations and foreign exchange transactions, and repay existing borrowings.

SEBI clarified that the borrowing is intended solely to bridge temporary liquidity mismatches created by settlement timing differences and should not be viewed as an additional funding source for investment activities.

Borrowing linked to receivables

The regulator has prescribed clear limits on the amount mutual funds can borrow during the day.

The borrowing limit will primarily depend on guaranteed receivables, including subscription inflows credited to scheme bank accounts, payments expected from the Reserve Bank of India (RBI) and receipts from clearing corporations.

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Mutual funds may also borrow against non-guaranteed receivables expected to be realised by the end of the day. These include maturity proceeds and settlement inflows from non-convertible debentures (NCDs), commercial papers (CPs), certificates of deposit (CDs) and over-the-counter (OTC) swaps.

Additionally, SEBI has permitted Asset Management Companies (AMCs) to avail intraday borrowing beyond these receivables exclusively to meet redemption requests and other unitholder payouts permitted under the regulations.

AMCs must repay borrowings the same day

The market regulator has placed strict safeguards around the use of the facility. It has directed AMCs to ensure that all intraday borrowings are repaid by the end of the day.

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If any borrowing extends beyond the trading day and becomes an overnight borrowing, it must remain within existing regulatory borrowing limits and be used only for purposes permitted under Regulation 42 of the SEBI (Mutual Funds) Regulations, 2026.

To strengthen governance, SEBI has mandated that the boards of AMCs and trustees approve a formal policy governing the use of intraday borrowing. The policy must cover approval processes, monitoring mechanisms and internal controls, and must also be disclosed on the AMC's website. AMCs are further required to maintain scheme-wise records detailing the liquidity mismatch that necessitated the borrowing and the expected source of repayment.

Investors shielded from borrowing costs

One of the key investor-protection measures in the framework is that the cost of intraday borrowing will be borne entirely by the Asset Management Company, not by the mutual fund scheme or its investors.

SEBI has also clarified that any loss or cost arising from delays in receiving expected receivables must likewise be absorbed by the AMC.

The new framework is expected to improve liquidity management across mutual fund schemes by enabling AMCs to handle temporary cash flow mismatches more efficiently while ensuring timely investor payouts, smoother settlement of market transactions and stronger governance standards without impacting scheme returns.

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