SEBI Imposes New Rules for Mutual Fund Intraday Borrowings Effective April 2026
The Securities and Exchange Board of India (SEBI) has established specific conditions for intraday borrowings by mutual funds, a move aimed at addressing short-term timing mismatches in fund flows. This regulatory framework will come into effect from April 1, 2026, as per a circular issued by the market regulator on Friday.
Addressing Timing Mismatches in Fund Flows
SEBI explained that the need for intraday borrowings arises from timing mismatches between inflows and outflows in certain mutual fund schemes. In liquid and overnight schemes, redemption payouts to investors are typically processed in the morning hours of T+1 day, while maturity proceeds from TREPS and reverse repo are received in the evening hours of the same day. To bridge this gap, mutual funds often enter into formal intraday borrowing arrangements with financial institutions such as banks.
Permissible Uses and Limits on Borrowings
Under the new rules, SEBI has specified that intraday borrowings can only be used for specific purposes. These include repurchase or redemption of units, payment of interest, or Income Distribution cum Capital Withdrawal payouts to unitholders. To ensure financial discipline, the regulator has imposed limits on such borrowings. The amount of intraday borrowings must not exceed the guaranteed receivables due on the same day from entities like the Government of India, Reserve Bank of India, and Clearing Corporation of India Limited. Eligible receivables include maturity proceeds from TREPS, reverse repo proceeds, and sale proceeds of government securities.
Policy Requirements and Cost Responsibilities
SEBI has directed asset management companies (AMCs) to adopt formal policies governing the use of intraday borrowing facilities. These policies must be approved by both the Board of the AMC and the Board of Trustees and uploaded on the AMC's website. Additionally, any costs associated with intraday borrowings, including those from unforeseen events or delays in fund receipt, must be borne by the AMC, not the investors.
Special Provisions for Equity Funds
Separately, SEBI clarified that borrowing by equity-oriented index funds and exchange-traded funds (ETFs) due to under-execution of sell trades will be permitted only in specific cases. Such borrowings are allowed solely for participation in the Closing Auction Session in the equity cash segment of stock exchanges. This provision aligns with SEBI's earlier circular introducing a closing auction session from August 3, 2026.
Investor Protection and Market Development
The circular emphasizes that these measures are designed to protect investor interests and promote the orderly development of the securities market. By regulating intraday borrowings, SEBI aims to enhance transparency and reduce risks associated with timing mismatches in mutual fund operations. This regulatory update is part of SEBI's ongoing efforts to strengthen the financial ecosystem and ensure robust market functioning.
