The Securities and Exchange Board of India (SEBI) has formally allowed mutual funds to undertake intraday borrowings, bringing regulatory clarity to a long-standing industry practice used to manage short-term liquidity mismatches.
The framework, notified under the SEBI (Mutual Funds) Regulations, 2026, takes effect from April 1 and permits intraday borrowing only to meet investor redemption payouts, interest payments or income distribution. The regulator has also laid down strict conditions to ensure investors do not bear any cost or risk.
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Liquid and overnight schemes have long faced a timing mismatch on T+1 days. Redemption payouts are processed in the morning, while inflows from instruments such as TREPS and reverse repos are received later in the day.
Asset management companies have typically relied on informal intraday funding lines to bridge this gap. SEBI has now recognised this operational reality and placed it within a formal regulatory framework.
Industry impact and investor safeguards
Under the new rules, intraday borrowing is allowed only against guaranteed receivables due on the same day, including maturity proceeds from TREPS, reverse repos and government securities. The borrowing limit is linked to these receivables and is not subject to the 20 percent net asset cap that applies to longer-term borrowing.
AMCs are required to put in place a board-approved intraday borrowing policy and disclose it publicly. SEBI has also mandated that all costs and losses arising from intraday borrowing, including those due to settlement delays, must be borne entirely by the AMC.
"SEBI's latest circular is a masterstroke in regulatory precision, finally decoupling intraday borrowing from the restrictive 20% cap and six-month duration typically applied to mutual fund credit," said Shravanth Shanker, Managing Partner, B.Shanker Advocates LLP.
Shanker said the circular provides legal clarity to an industry practice that had evolved informally to manage T+1 settlement pressures. By allowing intraday borrowing beyond the 20 percent threshold only when backed by guaranteed receivables from entities such as the Government of India, RBI or CCIL, SEBI has enabled operational flexibility without increasing systemic risk.
He added that placing the full cost and risk on AMCs strengthens accountability, while the extension of borrowing permissions to ETFs and index funds reflects the regulator's understanding of changing market structure.
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"For the mutual fund industry, the main implication is operational clarity for practices that already existed in the market. Conditions for Intraday borrowing is now formally set out," said Apurva Kanvinde, Partner, Juris Corp.
"It is ring-fenced with clearly set out limits linked to guaranteed receivables and the cost and risk sitting with the AMCs, enhancing corporate governance requirements. At the same time, borrowing by equity index funds and exchange traded funds has been tied to closing auction settlement mechanics."
SEBI has clarified that equity-oriented index funds and ETFs can borrow only for participation in closing auction sessions, addressing settlement risks arising from under-execution of sell trades.
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