SEBI Proposes Expanded Intraday Borrowing Use for Mutual Funds

The Securities and Exchange Board of India (SEBI) has proposed expanding the use of intraday borrowing facilities for mutual funds. The move aims to address operational challenges arising from timing mismatches between inflows and outflows within schemes.

Currently, such borrowings are primarily used for meeting redemption payouts. The proposal seeks to enhance flexibility in liquidity management across a broader set of transactions.

Existing Framework and Operational Constraints

At present, mutual funds can utilise intraday borrowing mainly to meet redemption and unitholder payout obligations. This framework helps fund managers manage short-term liquidity needs during settlement cycles.

However, restrictions on usage limit flexibility in handling other cash flow requirements within a trading day. SEBI noted that such constraints may affect the ability of asset management companies (AMCs) to efficiently execute market transactions.

Proposed Expansion in Borrowing Scope

Under the proposal, AMCs may be allowed to use intraday borrowings for multiple purposes beyond redemptions. These include pay-in obligations for trades, foreign exchange settlements, and mark-to-market margin payments on derivatives.

The facility may also be used for repayment of existing borrowings within the same day. This broader scope is intended to align liquidity tools with evolving operational needs in the mutual fund industry.

Changes In Borrowing Limits and Conditions

SEBI has proposed that intraday borrowings need not be restricted to guaranteed receivables from entities such as the Government of India, the Reserve Bank of India, or clearing corporations. AMCs may borrow amounts exceeding receivables, provided such borrowings are repaid by the end of the trading day.

If any portion converts into overnight borrowing, it must remain within the regulatory ceiling of 20% of scheme assets. These borrowings must also comply with existing permissible purposes under the SEBI (Mutual Funds) Regulations, 2026.

Impact On Fund Operations and Returns

The regulator highlighted that intraday borrowing plays a crucial role in efficient fund management and timely trade execution. Without adequate flexibility, fund managers may face constraints in executing buy and sell decisions within the same trading session.

Delays in receiving settlement inflows can restrict the effective deployment of funds. By enabling broader usage, the proposal seeks to minimise such inefficiencies and support smoother portfolio operations.

Read More: SEBI Proposes Higher Position Limits for Agricultural Commodity Derivatives.

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Conclusion

SEBI’s proposal aims to modernise liquidity management practices within the mutual fund industry. By expanding the scope of intraday borrowing, the regulator seeks to address operational mismatches and improve efficiency in fund management.

The revised framework maintains safeguards around repayment timelines and borrowing limits. The consultation process will shape the final structure of the proposed changes based on stakeholder feedback.

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