SEBI revises intraday borrowing rules, gives mutual funds more flexibility

Market regulator Securities and Exchange Board of India (SEBI) has approved changes to the framework governing intraday borrowings by mutual funds, giving asset management companies (AMCs) greater flexibility to use short-term bank borrowings for a wider range of operational requirements beyond investor redemptions.

The move comes after the mutual fund industry raised concerns over the framework notified earlier this year, arguing that the existing restrictions could hamper efficient fund management.

Currently, mutual funds are permitted to access intraday borrowings mainly to meet redemption payouts, interest payments and Income Distribution-cum-Capital Withdrawal (IDCW) obligations. Such borrowings are also capped by guaranteed receivables expected on the same day.

Under the revised framework, SEBI has expanded the permissible uses of intraday borrowings, allowing fund houses to deploy them for cash management purposes such as settlement of securities trades, foreign exchange transactions, mark-to-market obligations arising from derivative positions and repayment of existing borrowings.

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The regulator observed that limiting intraday borrowing only to redemption-related payouts could reduce operational flexibility and potentially affect scheme returns.

SEBI has also eased restrictions on the amount that can be borrowed by permitting AMCs to consider expected inflows that are not formally guaranteed. These include proceeds from secondary market sales, maturity receipts and other settlement-related cash flows, enabling fund houses to borrow beyond the level of guaranteed receivables.

However, AMCs will be required to ensure that all such borrowings are repaid before the end of the trading day. Any amount that remains unpaid beyond the same day will be treated as regular borrowing and will have to adhere to the existing borrowing limits prescribed under mutual fund regulations.

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According to SEBI, the move is intended to bridge temporary timing mismatches between payment obligations and incoming cash flows that arise during daily settlement cycles. Industry body AMFI had represented that fund houses frequently face situations where pay-ins for securities, forex settlements or derivative obligations are due early in the day, while corresponding receivables are credited only later.

The regulator said that the cost of intraday borrowing, as well as any loss arising from delays in receiving expected funds, will continue to be borne by the AMC rather than by mutual fund investors, ensuring that unitholders are insulated from these operational costs.

SEBI believes the changes will strengthen liquidity management, reduce the need for distress asset sales during temporary cash mismatches and facilitate smoother execution of investment and settlement activities.

The regulator's decision is expected to provide mutual funds with greater operational flexibility while safeguarding investor interests, as the burden of any borrowing costs or losses arising from delays in cash inflows will continue to rest with the fund houses.

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