- The Securities and Exchange Board of India (SEBI) has introduced a significant reform to improve operational efficiency in the mutual fund industry by expanding the scope of intraday borrowing for Asset Management Companies (AMCs).
- The revised framework, effective July 15, 2026, gives fund houses greater flexibility to manage temporary liquidity mismatches while maintaining strong safeguards to protect investors.
- The move comes after industry representations seeking operational flexibility and follows SEBI’s board approval in June 2026.
What Has Changed?
- SEBI has relaxed the earlier framework governing intraday borrowings by mutual funds.
- Previously, intraday borrowing was allowed only against guaranteed receivables expected on the same day. Under the revised framework, this restriction has been removed, enabling AMCs to use short-term borrowing for broader liquidity management needs.
- This change provides greater operational flexibility while ensuring that borrowings remain temporary and do not increase long-term financial risks.
Permitted Uses of Intraday Borrowing
Under the revised norms, mutual funds can now use intraday borrowing for:
- Meeting investor redemption payouts
- Trade settlement obligations
- Managing temporary cash flow mismatches
- Foreign exchange settlements
- Derivative margin payments
These additional uses are expected to improve settlement efficiency and reduce operational bottlenecks during trading hours.
Investor Protection Measures Remain Intact
Although SEBI has broadened borrowing flexibility, investor protection remains a key priority.
Important safeguards include:
- Every intraday borrowing must be repaid before the close of the same trading day.
- Borrowing costs cannot be charged to mutual fund schemes.
- The AMC will bear the entire cost of borrowing.
- Any losses resulting from delayed receivables must also be absorbed by the AMC.
These measures ensure that investors are insulated from the financial impact of temporary liquidity management by fund houses.
Mandatory Governance Framework
To strengthen governance, SEBI has directed every AMC to establish a comprehensive policy governing intraday borrowings.
The policy must:
- Be approved by the AMC’s Board of Directors.
- Receive approval from the Board of Trustees.
- Be disclosed publicly on the AMC’s official website.
This promotes transparency and accountability in the use of short-term borrowing facilities.
Relief for Index Funds and ETFs
- SEBI has also extended operational flexibility to equity-oriented index funds and Exchange Traded Funds (ETFs).
- These funds can now use intraday borrowing to cover sell trades that are not completed on time, solely for participation in the closing auction session conducted by stock exchanges.
- This provision is expected to improve tracking efficiency and reduce settlement risks for passive investment products.
Impact on Mutual Fund Investors
For investors, the changes are largely positive.
The revised framework does not allow AMCs to increase borrowing indefinitely. Instead, it provides greater operational efficiency while ensuring:
- Faster redemption processing
- Improved settlement management
- Better fund operations
- No additional costs for investors
- Continued regulatory oversight
The reform primarily enhances backend operational efficiency rather than altering investment strategies or risk profiles.
Industry Outlook
- India’s mutual fund industry has witnessed rapid growth in assets under management and transaction volumes.
- As trading activity becomes increasingly sophisticated, temporary liquidity mismatches have become more common during the trading day.
- SEBI’s revised framework aligns regulatory practices with evolving market requirements while maintaining strict risk controls.
- Industry experts believe the move will improve operational resilience without compromising investor interests.
Key Highlights
- SEBI expands the scope of intraday borrowing for mutual funds.
- New rules become effective from July 15, 2026.
- Earlier restriction linking borrowing to guaranteed same-day receivables removed.
- AMCs can use intraday borrowing for multiple operational purposes.
- Borrowings must still be repaid on the same trading day.
- Borrowing costs will be borne entirely by the AMC.
- Investors will not bear any borrowing-related costs.
- AMCs must formulate and publicly disclose a board-approved borrowing policy.
Conclusion
SEBI’s decision to ease intraday borrowing norms marks another important step toward modernizing India’s mutual fund regulatory framework. By allowing AMCs greater flexibility in managing short-term liquidity while preserving strict repayment requirements and investor safeguards, the regulator aims to improve operational efficiency across the industry.
With the new rules taking effect on July 15, 2026, mutual funds are expected to benefit from smoother settlement processes, enhanced liquidity management, and improved market efficiency without increasing risks for investors.