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.
๐ฆ๐๐๐ ๐ต๐ฎ๐ ๐ฐ๐ผ๐ป๐ณ๐ถ๐ฟ๐บ๐ฒ๐ฑ ๐๐ต๐ฎ๐ ๐บ๐๐๐๐ฎ๐น ๐ณ๐๐ป๐ฑ๐ ๐ฐ๐ฎ๐ป ๐ฏ๐ผ๐ฟ๐ฟ๐ผ๐ ๐บ๐ผ๐ป๐ฒ๐ ๐ณ๐ผ๐ฟ ๐ฎ ๐ณ๐ฒ๐ ๐ต๐ผ๐๐ฟ๐ (๐ถ๐ป๐๐ฟ๐ฎ๐ฑ๐ฎ๐) ๐ณ๐ฟ๐ผ๐บ ๐ฏ๐ฎ๐ป๐ธ๐ ๐๐ผ ๐ฝ๐ฎ๐ ๐ฟ๐ฒ๐ฑ๐ฒ๐บ๐ฝ๐๐ถ๐ผ๐ป๐ ๐ฏ๐ฒ๐ณ๐ผ๐ฟ๐ฒ ๐๐ต๐ฒ๐ถ๐ฟ ๐ถ๐ป๐๐ฒ๐๐๐บ๐ฒ๐ป๐๐ ๐บ๐ฎ๐๐๐ฟ๐ฒ, ๐ฎ๐ป๐ฑ ๐๐ต๐ถ๐ ๐ฏ๐ผ๐ฟ๐ฟ๐ผ๐๐ถ๐ป๐ด ๐๐ถ๐น๐น ๐ป๐ผ๐ ๐ฐ๐ผ๐๐ป๐ ๐๐ผ๐๐ฎ๐ฟ๐ฑ๐ ๐๐ต๐ฒ ๐ฎ๐ฌ% ๐ฏ๐ผ๐ฟ๐ฟ๐ผ๐๐ถ๐ป๐ด ๐น๐ถ๐บ๐ถ๐ ๐๐ป๐ฑ๐ฒ๐ฟ ๐๐ต๐ฒ ๐ป๐ฒ๐ ๐ ๐๐๐๐ฎ๐น ๐๐๐ป๐ฑ ๐ฅ๐ฒ๐ด๐๐น๐ฎ๐๐ถ๐ผ๐ป๐.
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.
๐๐ฆ๐จ๐ถ๐ญ๐ข๐ต๐ฐ๐ณ๐บ ๐ด๐ฉ๐ช๐ง๐ต ๐ง๐ณ๐ฐ๐ฎ ๐ต๐ฉ๐ฆ 1996 ๐ง๐ณ๐ข๐ฎ๐ฆ๐ธ๐ฐ๐ณ๐ฌ
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.
๐๐ฆ๐บ ๐๐ข๐ฌ๐ฆ๐ข๐ธ๐ข๐บ๐ด
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.