- SEBI proposes allowing mutual funds to net cash-market obligations for outright transactions within cycles
- Netting applies only at individual scheme level, excluding transactions with both buys and sells in cycle
- Securities settlement remains gross, preserving delivery-backed nature and existing tax and duty treatments
The Securities and Exchange Board of India has proposed allowing mutual fund schemes to net their cash-market fund obligations for certain outright transactions, a move that could reduce the temporary funding they need to meet settlement obligations.
Under the proposal, a scheme could net the value of eligible outright purchases against eligible outright sales within the same settlement cycle. The securities themselves would continue to be settled on a gross basis, preserving the delivery-backed nature of institutional trades.
SEBI has sought public comments on the proposal by Sept. 24, according to the consultation paper issued on Thursday.
The regulator said mutual fund schemes can face temporary liquidity requirements and operational inefficiencies because cash obligations in the cash market are currently met on a gross basis at the scheme level. The issue can become more pronounced during index rebalancing, when passive funds adjust portfolios, as well as during periods of large subscriptions or redemptions.
"Since SEBI has already allowed net settlement of funds framework for FPIs," the regulator said, it was proposing a "suitably tailored framework" for mutual funds, subject to safeguards.
The proposed framework would apply only to outright transactions undertaken by a mutual fund scheme in the cash market through a recognised stock exchange. An outright transaction would mean either a purchase or a sale of a security, but not both, during a settlement cycle.
Transactions involving only purchases or only sales in a security could be considered when calculating the scheme's net fund obligation. Transactions in a security where the scheme has both bought and sold during the same settlement cycle would be excluded from netting and would continue to be settled on a gross basis.
SEBI said the proposal would allow netting only at the individual scheme level. Mutual funds would not be permitted to net obligations across different schemes of the same asset management company or make adjustments between schemes or portfolios.
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The AMC, mutual fund and custodian would also have to ensure that the mechanism does not affect scheme-level accounting, net asset value calculations, asset allocation, investment limits or unit-holder interests.
If the value of eligible outright sales is lower than eligible outright purchases, the scheme would have to fund the residual obligation. Any excess from outright sales could not be used to meet purchase obligations arising from transactions excluded from netting.
SEBI said the proposed framework could also reduce the intraday borrowing used by mutual fund schemes for settlement purposes.
The regulator's Mutual Fund Advisory Committee had recommended allowing net settlement for domestic institutional investors while considering rules for intraday borrowing by mutual funds, the paper said.
The proposal would not change the existing treatment of securities settlement. Securities would continue to be settled on a gross basis between the mutual fund scheme and its custodian, while securities transaction tax and stamp duty would continue to be charged on a delivery basis, where applicable.
SEBI has also proposed operational safeguards. AMCs, mutual funds and custodians would have to identify outright purchases, outright sales, non-outright transactions, gross fund obligations, net fund obligations and securities pay-in and pay-out obligations at the scheme level.
Custodians would have to maintain an audit trail of gross obligations, netted fund obligations and transactions excluded from netting. Trustees would be required to review implementation and ensure that the framework serves unit holders' interests.
The Association of Mutual Funds in India would formulate implementation standards in consultation with custodians, clearing corporations, stock exchanges and other relevant stakeholders. These standards could cover trade confirmations, reporting formats, reconciliation, exception handling, audit trails and scheme-level controls.
SEBI is seeking views on whether net settlement should be permitted for outright transactions by mutual fund schemes, whether transactions involving both purchases and sales of the same security in the same settlement cycle should remain outside the netting framework, and whether the framework should initially be limited to cash-market transactions by mutual fund schemes.
The consultation paper does not set an implementation date. It invites stakeholders to submit comments by Sept. 24, 2026.
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