The Securities and Exchange Board of India (SEBI) has introduced a significant new framework allowing mutual funds to utilize intraday borrowing facilities. This measure, set to become effective on September 1, 2026, aims to efficiently manage temporary liquidity mismatches that arise from differences in market settlement timings.
This strategic move by the capital markets regulator is designed to ensure smoother fund operations and facilitate timely payouts to investors, without disrupting market obligations. The new guidelines replace existing borrowing rules under the SEBI Master Circular for Mutual Funds, following amendments to the SEBI (Mutual Funds) Regulations, 2026.
Addressing Liquidity Gaps and Investor Payouts
Under the revised framework, mutual funds gain the flexibility to use intraday borrowing for various operational necessities. These include:
- Making payments to investors, such as redemption proceeds, Income Distribution-cum-Capital Withdrawal (IDCW) payouts, and interest payments.
- Meeting pay-in obligations stemming from scheme investments.
- Settling mark-to-market (MTM) obligations and foreign exchange transactions.
- Repaying existing short-term borrowings.
SEBI has explicitly clarified that this borrowing facility is solely intended to bridge temporary liquidity mismatches caused by settlement timing differences. It is not to be perceived as an additional funding source for investment activities.
Borrowing Limits and Repayment Mandates
The regulator has established clear limits for the amount mutual funds can borrow during a single day. These limits are primarily tied to guaranteed receivables, which encompass subscription inflows credited to scheme bank accounts, payments anticipated from the Reserve Bank of India (RBI), and receipts from clearing corporations.
Mutual funds may also borrow against non-guaranteed receivables expected to be realized by the day's end, such as maturity proceeds and settlement inflows from non-convertible debentures (NCDs), commercial papers (CPs), certificates of deposit (CDs), and over-the-counter (OTC) swaps. Additionally, Asset Management Companies (AMCs) are permitted to borrow beyond these receivables specifically to meet redemption requests and other unitholder payouts.
A strict safeguard is the mandate for AMCs to repay all intraday borrowings by the close of the same day. Should any borrowing extend beyond the trading day, becoming an overnight borrowing, it must adhere to existing regulatory borrowing limits and only be used for purposes sanctioned under Regulation 42 of the SEBI (Mutual Funds) Regulations, 2026.
Investor Protection and Governance
A crucial aspect of the new framework is the protection of investors from borrowing costs. SEBI has stipulated that the cost of intraday borrowing will be entirely borne by the Asset Management Company, not by the mutual fund scheme or its unitholders. Similarly, any losses or costs incurred due to delays in receiving expected receivables must also be absorbed by the AMC.
To enhance governance, SEBI requires the boards of AMCs and trustees to approve a formal policy outlining the use of intraday borrowing. This policy must detail approval processes, monitoring mechanisms, and internal controls, and it must be transparently disclosed on the AMC's website. Furthermore, AMCs are obligated to maintain scheme-wise records documenting the specific liquidity mismatch that necessitated the borrowing and the projected source of repayment.
This comprehensive framework is anticipated to significantly improve liquidity management across mutual fund schemes, enabling AMCs to handle temporary cash flow mismatches more effectively while ensuring timely investor payouts, smoother market transaction settlements, and reinforced governance standards, all without negatively impacting scheme returns.