The SEBI Board has approved the proposal to recognize intraday borrowing as a cash management tool for mutual funds by amending Regulation 42 of the SEBI (Mutual Funds) Regulations, 2026. According to the latest Board Memorandum, the proposal aims to permit intraday borrowings not only for redemption and unitholder payouts but also for pay-in obligations, forex settlements, derivative margin and MTM payments, and repayment of existing borrowings arising from timing mismatches in settlements. The framework allows such borrowings against both guaranteed and non-guaranteed receivables, with additional borrowing up to 20% of a scheme's net assets only for purposes already permitted under Regulation 42(1). Intraday borrowings must be extinguished by the end of the day, and any overnight borrowing must remain within regulatory limits. The Board has also proposed safeguards including board-approved policies, monitoring mechanisms, documentation, segregation of assets, and prescribed limits to ensure proper implementation.
SEBI had earlier, through a circular issued on April 24, permitted Foreign Portfolio Investors (FPIs) to settle cash market purchase and sale obligations with custodians on a net basis rather than the earlier gross settlement requirement. The relaxation came after FPIs and custodians highlighted that gross fund settlements created liquidity pressures, increased funding costs due to foreign exchange slippages, and resulted in operational inefficiencies, particularly during index rebalancing periods. Based on representations made by Association of Mutual Funds in India (AMFI), a carve out was made to exclude intraday borrowings from the borrowing limit of twenty per cent of the net assets of the scheme in SEBI (Mutual Funds) Regulations, 2026 which came into effect from April 1, 2026. The quantum of such intraday borrowings is limited to the extent of guaranteed receivables from RBI and CCIL. However, due to operational challenges raised by AMFI and AMCs, the applicability of the guidelines related to intraday borrowing has been deferred till July 15, 2026.
The proposal received overwhelming support during the public consultation process, with 29 respondents providing feedback including 21 mutual funds, 1 law firm, 1 clearing corporation, 1 exchange, 2 custodians, 2 banks and 1 consultant. According to the consultation responses, mutual funds agreed that intraday borrowings for purposes other than meeting redemption/unitholder payouts may be allowed, as it may lead to inefficient cash management and higher cash holdings. The industry supported the proposal to allow intraday borrowings not limited to guaranteed receivables, with appropriate controls, monitoring framework and end-of-day extinguishment of such borrowings. Mutual Funds (19) and Exchange (1) agreed that the proposal to allow quantum of intraday borrowings in excess of receivables would be appropriate, provided AMCs ensure that intraday borrowings are extinguished at the end of the day or converted into overnight borrowings within regulatory limits. Mutual Funds (10) also suggested that costs of intraday borrowings arising due to external factors should not be borne by the AMC, and recommended extending the Net Settlement Framework to Mutual Funds in Cash Equity Segment.
The Mutual Fund Advisory Committee (MFAC) discussed the proposal and recommended that intraday borrowing should be allowed only for liquidity mismatches during the day and should be brought to zero at end of day. MFAC recommended that the quantum of intraday borrowings should be restricted to receivables sighted during the day (Guaranteed + Non-guaranteed) and intraday borrowing in addition to this to the extent and purposes specified under Regulation 42(1). The committee emphasized that intraday borrowings should be subject to conditions including all overnight borrowings being in accordance with Regulation 42(1) of SEBI (Mutual Funds) Regulations, 2026, and AMCs should maintain adequate documentation evidencing the underlying liquidity mismatch and expected source of repayment. MFAC also recommended that net settlement for DIIs should be allowed in line with FPIs, extending the net settlement framework to mutual funds in cash equity segment. The Board is requested to approve the amendments and empower the Chairman to implement the changes through regulations and circulars.
The intraday borrowing facility serves multiple purposes including difference in pay-out/pay-in settlement timing across various asset classes, redemptions being processed in early morning hours, forex settlements, borrowing payments, MTM of derivative positions, and repayment of existing borrowings. As per the latest Board Memorandum, the requirement of intraday borrowings arises due to timing mismatches in outflows by schemes vis-a-vis receivables from different sources. The fund managers' decision-making would be impacted due to inability to make buy and sell trades during the same day, and since pay-in has to be made before specific cut-off timings, scheme receivables received later in the evening cannot be deployed effectively. The framework addresses these operational challenges while maintaining investor protection through strict safeguards and regulatory oversight. The quantum of intraday borrowings is not necessarily limited to guaranteed receivables from RBI, CCIL and other clearing corporations but can also exceed both guaranteed and non-guaranteed receivables from maturity proceeds/secondary market settlement from NCDs, CP/CDs, OTC Swaps, etc.
