On March 13, 2026, Securities and Exchange Board of India (SEBI) issued a circular providing clarity on intraday borrowing arrangements by mutual fund schemes under the newly notified SEBI (Mutual Funds) Regulations, 2026.
𝗦𝗘𝗕𝗜 𝗵𝗮𝘀 𝗰𝗼𝗻𝗳𝗶𝗿𝗺𝗲𝗱 𝘁𝗵𝗮𝘁 𝗺𝘂𝘁𝘂𝗮𝗹 𝗳𝘂𝗻𝗱𝘀 𝗰𝗮𝗻 𝗯𝗼𝗿𝗿𝗼𝘄 𝗺𝗼𝗻𝗲𝘆 𝗳𝗼𝗿 𝗮 𝗳𝗲𝘄 𝗵𝗼𝘂𝗿𝘀 (𝗶𝗻𝘁𝗿𝗮𝗱𝗮𝘆) 𝗳𝗿𝗼𝗺 𝗯𝗮𝗻𝗸𝘀 𝘁𝗼 𝗽𝗮𝘆 𝗿𝗲𝗱𝗲𝗺𝗽𝘁𝗶𝗼𝗻𝘀 𝗯𝗲𝗳𝗼𝗿𝗲 𝘁𝗵𝗲𝗶𝗿 𝗶𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁𝘀 𝗺𝗮𝘁𝘂𝗿𝗲, 𝗮𝗻𝗱 𝘁𝗵𝗶𝘀 𝗯𝗼𝗿𝗿𝗼𝘄𝗶𝗻𝗴 𝘄𝗶𝗹𝗹 𝗻𝗼𝘁 𝗰𝗼𝘂𝗻𝘁 𝘁𝗼𝘄𝗮𝗿𝗱𝘀 𝘁𝗵𝗲 𝟮𝟬% 𝗯𝗼𝗿𝗿𝗼𝘄𝗶𝗻𝗴 𝗹𝗶𝗺𝗶𝘁 𝘂𝗻𝗱𝗲𝗿 𝘁𝗵𝗲 𝗻𝗲𝘄 𝗠𝘂𝘁𝘂𝗮𝗹 𝗙𝘂𝗻𝗱 𝗥𝗲𝗴𝘂𝗹𝗮𝘁𝗶𝗼𝗻𝘀.
In practice, particularly for liquid and overnight schemes, redemption payouts are typically processed in the morning of T+1, while maturity proceeds from instruments such as TREPS or reverse repo are received later in the evening on the same day. This timing mismatch between inflows and outflows has required mutual funds to rely on short-term intraday borrowing arrangements with banks to bridge the temporary liquidity gap.
𝘙𝘦𝘨𝘶𝘭𝘢𝘵𝘰𝘳𝘺 𝘴𝘩𝘪𝘧𝘵 𝘧𝘳𝘰𝘮 𝘵𝘩𝘦 1996 𝘧𝘳𝘢𝘮𝘦𝘸𝘰𝘳𝘬
Under Regulation 44(2) of the erstwhile SEBI (Mutual Funds) Regulations, 1996, mutual funds were permitted to borrow only to meet temporary liquidity needs for repurchase or redemption of units or payment of interest or dividend to unitholders. Such borrowing was capped at 20% of the net assets of the scheme and could not exceed six months in duration.
The SEBI (Mutual Funds) Regulations, 2026 clarify that while Regulation 42(1) retains the borrowing cap of 20% of net assets for up to six months and expands permitted purposes to include settlement of trades by equity-oriented index funds and ETFs where sell trades remain under-executed, Regulation 42(2) specifies that this 20% limit will not apply to intraday borrowing, thereby recognising the operational need for such borrowing to manage temporary liquidity mismatches.
Through the present circular, SEBI has formally acknowledged the operational realities of liquidity management for mutual fund schemes and clarified that intraday borrowing arrangements with banks may continue to be used to manage temporary cash flow mismatches.
𝘒𝘦𝘺 𝘛𝘢𝘬𝘦𝘢𝘸𝘢𝘺𝘴
1. Intraday borrowing to address timing mismatches between redemption payouts and investment maturity proceeds has been formally recognised within the regulatory framework.
2. The 20% borrowing cap does not apply to intraday borrowing under the 2026 Regulations.
The circular provides useful regulatory clarity for the mutual fund industry as the SEBI (Mutual Funds) Regulations, 2026 come into effect from April 1, 2026. A copy of the circular is attached.