Sebi sets new conditions for intraday borrowing by mutual funds from April 1

Capital markets regulator Sebi on Friday issued new conditions for intraday borrowing by mutual funds to address temporary liquidity mismatches while putting in place safeguards to ensure investor protection. The new framework will come into effect from April 1.

Sebi said mutual funds often face intraday timing mismatches between redemption payouts and inflows from investments. Typically, redemption payments to investors are processed during the morning hours of the settlement day (T+1), while funds from instruments such as TREPS and reverse repo transactions are received later in the evening.

To bridge this temporary funding gap, mutual fund schemes sometimes rely on short-term borrowing arrangements from banks or other financial institutions. The regulator said the new rules formally recognise this practice while placing clear limits and operational conditions.Mutual funds are generally allowed to borrow up to 20% of the net assets of a scheme for a maximum period of six months for purposes such as meeting redemption requests, paying income distribution or settling certain trades. However, this 20% cap will not apply to intraday borrowings, provided they meet specific conditions laid out by the regulator.

Sebi clarified that intraday borrowing can be used only to facilitate repurchase or redemption of units, interest payments or income distribution payouts to unitholders.

The regulator also capped the quantum of intraday borrowing. The amount borrowed cannot exceed receivables guaranteed on the same day from institutions such as the Government of India, the Reserve Bank of India, and the Clearing Corporation of India.Eligible receivables include maturity proceeds from TREPS, reverse repo transactions, government securities, treasury bills, state development loans, STRIPS, as well as interest payments and sale proceeds from these instruments.To strengthen oversight, Sebi has mandated that each asset management company’s board and trustees must approve a formal policy governing the use of intraday borrowing facilities, which must also be disclosed on the AMC’s website.

The regulator further said that any cost associated with intraday borrowing must be borne by the asset management company, not by the mutual fund scheme or its investors. Similarly, any losses arising from delays or unforeseen issues in receiving expected funds must also be absorbed by the AMC.

Sebi also addressed borrowing by equity-oriented index funds and exchange-traded funds (ETFs). Such funds will be allowed to borrow funds in cases where sell trades are not executed on time, but only to facilitate participation in the closing auction session of stock exchanges, which will become effective from August 3.