SEBI Permits IAs, RAs to Use Liquid, Overnight Funds for Deposit Requirements

The Securities and Exchange Board of India (SEBI) has allowed Investment Advisers (IAs) and Research Analysts (RAs) to use liquid mutual funds and overnight funds, alongside fixed deposits, to meet deposit requirements mandated under regulatory norms.

Existing Framework and Challenges

As per current rules, IAs and RAs must maintain a deposit with a scheduled bank, with a lien marked in favour of the Administration and Supervisory Body (ASB). However, industry bodies raised concerns about difficulties in opening fixed deposit accounts due to inconsistent procedures across banks and delays in lien marking. 

These challenges led to a request for alternative options such as mutual fund units.

New Provision Approved

SEBI’s board approved the use of liquid and overnight mutual funds as valid instruments to meet deposit norms. These funds can now be lien-marked in favour of ASB, just like bank fixed deposits. The board noted that both fund types operate within the securities ecosystem and can be digitally managed through demat or online platforms.

Operational Details

The value of mutual fund units will be calculated based on net asset value (NAV), after accounting for any exit load to address market risks. This net amount will be treated as the effective deposit. If the deposit value drops below the required amount, either due to market movement or an increase in the number of clients, additional units must be lien-marked to cover the shortfall. Annual reviews of deposit adequacy will be required.

Read more: AlphaGrep Secures SEBI Approval to Start Mutual Fund Business!

Context and Timeline

In May 2025, SEBI released a consultation paper proposing this change. Earlier, in December 2024, the regulator had removed net-worth requirements and replaced them with deposit-based compliance measures for IAs and RAs.

Separate Update on VCFs

SEBI also approved a one-time settlement scheme for Venture Capital Funds (VCFs) that failed to wind up their schemes within the prescribed timelines. The last date to apply is January 19, 2025. The scheme applies only to those who have migrated to the AIF regime.

Conclusion

This update provides IAs and RAs with a practical alternative to fixed deposits, reducing procedural delays. It also aligns compliance more closely with market-linked instruments already within the securities ecosystem.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. 

Mutual Fund Investments are subject to market risks, read all the related documents carefully before investing.