The Securities and Exchange Board of India has proposed allowing mutual fund schemes to net their cash-market fund obligations for certain outright transactions, a move that could reduce the temporary funding they need to meet settlement obligations. According to the consultation paper issued on September 3, under the proposal, a scheme could net the value of eligible outright purchases against eligible outright sales within the same settlement cycle. The securities themselves would continue to be settled on a gross basis, preserving the delivery-backed nature of institutional trades. This proposal would extend to domestic mutual funds a facility that SEBI already permitted for foreign portfolio investors earlier this year, as reported by The Financial Express. SEBI stated that the proposal is intended to facilitate ease of doing business, improve settlement efficiency and reduce temporary liquidity requirements for mutual fund schemes, while ensuring that existing safeguards relating to delivery-based settlement, scheme-wise accounting, valuation and investor protection remain unaffected. The regulator had earlier allowed net settlement for outright purchase or sale transactions undertaken by FPIs in April, with the proposal specifically aimed at reducing temporary liquidity pressure, especially during index rebalancing and periods of large subscriptions or redemptions.
SEBI stated that mutual fund schemes can face temporary liquidity requirements and operational inefficiencies because cash obligations in the cash market are currently met on a gross basis at the scheme level. The issue becomes more pronounced during index rebalancing, when passive funds adjust portfolios, as well as during periods of large subscriptions or redemptions. The proposed framework would apply only to outright transactions undertaken by a mutual fund scheme in the cash market through a recognised stock exchange, with transactions involving both purchases and sales excluded from netting and continuing to be settled on a gross basis. Under the proposal, net settlement of funds would be permitted only at the level of an individual mutual fund scheme, with transactions eligible for netting having to be either a sale or purchase in a security, but not both. For example, if a scheme buys securities worth ₹100 crore and has eligible sales worth ₹90 crore, it could settle the net cash requirement of ₹10 crore instead of arranging the full purchase amount separately. As per The Financial Express, under the current arrangement, a scheme must arrange funds for purchases independently of the sale proceeds receivable during the same settlement cycle, even when the two sets of transactions effectively offset each other. The proposed framework could also reduce the intraday borrowing used by mutual fund schemes for settlement purposes, according to SEBI. SEBI has drawn a clear line around transactions that could resemble intraday trading, with if a scheme buys and sells the same security on the same day, those obligations will not qualify for netting and will continue to be settled on a gross basis. The regulator has also clarified that the fund house will only need to settle transactions under the proposed mechanism where the value of purchase transactions exceeds the value of sale transactions.
The proposed regulations will allow mutual funds to settle their obligations on a net basis for outright purchase or sale transactions, but not for transactions involving both at the same time. According to the consultation paper, the fund houses can net obligations for such outright transactions at the scheme level during a settlement cycle, but no netting will be allowed across schemes. SEBI has clarified that the fund house will only need to settle transactions under the proposed mechanism where the value of purchase transactions exceeds the value of sale transactions. The regulator has also asked the Association of Mutual Funds in India (AMFI) to formulate the implementation standards in consultation with other stakeholders like custodians, clearing corporations and stock exchanges. These standards could cover trade confirmations, reporting formats, reconciliation, exception handling, audit trails and scheme-level controls. SEBI has proposed operational safeguards, with custodians required to maintain an audit trail of gross obligations, netted fund obligations and transactions excluded from netting, while trustees would be required to review implementation and ensure the framework serves unit holders' interests. The proposal provides specific examples, showing how a scheme trading three stocks in one settlement cycle would pay ₹1,000 and receive ₹3,000 under the proposal, compared to paying ₹2,000 and receiving ₹4,000 under current rules.
SEBI has proposed significant restrictions on the netting framework to ensure proper oversight and manage operational risks. The proposal would allow netting only at the individual scheme level, with mutual funds not permitted to net obligations across different schemes of the same asset management company or make adjustments between schemes or portfolios. According to the consultation paper, the AMC, mutual fund and custodian would also have to ensure that the mechanism does not affect scheme-wise accounting, net asset value calculations, asset allocation, investment limits or unit-holder interests. If the value of eligible outright sales is lower than eligible outright purchases, the scheme would have to fund the residual obligation. If a mutual fund both buys and sells the same security during the same settlement cycle, those transactions will not qualify for netting and will continue to be settled on a gross basis. Where outright sale transactions exceed outright purchases, the excess sale amount cannot be adjusted against purchase obligations arising from non-outright transactions. As per The Financial Express, allowing net settlement can make purchase confirmation by the scheme dependent on sale confirmation to its custodians, potentially increasing custodian-level settlement risks due to timing gaps. The proposed change applies only to fund settlement, with settlement of securities continuing on a gross basis, preserving the delivery-backed nature of institutional transactions. The framework ensures that only cash is netted, not shares, with every share bought being delivered and paid for separately, maintaining the fundamental delivery-based settlement discipline established by SEBI.
SEBI has sought public comments on the proposal by September 24, 2026, according to the consultation paper. The market regulator issued the consultation paper on September 3, giving stakeholders approximately three weeks to submit their feedback. The proposal follows feedback from market participants that mutual fund schemes can face temporary liquidity pressures and operational inefficiencies because cash-market fund obligations are effectively settled on a gross basis at the scheme level. The move comes after the market regulator allowed FPIs to net their trades in its latest board meeting in April, with the proposal specifically aimed at reducing temporary liquidity pressure, especially during index rebalancing and periods of large subscriptions or redemptions. SEBI is seeking views on whether net settlement should be permitted for outright transactions by mutual fund schemes, whether transactions involving both purchases and sales of the same security in the same settlement cycle should remain outside the netting framework, and whether the framework should initially be limited to cash-market transactions by mutual fund schemes. As per The Financial Express, the industry had told SEBI these issues become more pronounced for a scheme during days of large subscriptions or redemptions by investors and on index rebalancing days when passive funds have to buy or sell to effect portfolio changes to realign with the changed index composition, with a scheme having outright purchase obligations in some securities and outright sale receivables in others within the same settlement cycle.
