SEBI's intraday borrowing proposal: What it means for mutual funds
What's the story
The Securities and Exchange Board of India (SEBI) has proposed a major change in the way mutual funds operate. The regulator wants to allow these funds to use intraday borrowing facilities for more than just investor redemption payouts. This would give fund managers more flexibility in managing their daily cash flows and help them bridge timing gaps in settlements. The proposal was made on May 13, with public comments invited until June 3, 2026.
Concept clarification
Understanding intraday borrowing
Intraday borrowing is a short-term loan that is taken and repaid within the same trading day. It acts as a temporary funding bridge for mutual funds when they have to make payouts before receiving incoming funds. For instance, if a fund has to pay for equity purchases or investor redemptions in the morning but expects proceeds from bond sales later in the day, it can borrow money temporarily and repay once expected inflows are credited.
Proposal details
Proposed changes in the current framework
SEBI's proposal seeks to allow mutual funds to use intraday borrowing for trade settlements, forex obligations, and derivative margin payments. The current framework links intraday borrowing mainly with guaranteed receivables from institutions like the Government of India, Reserve Bank of India (RBI), and Clearing Corporation of India Limited. However, SEBI is considering allowing mutual funds more leeway in their daytime borrowing even if incoming money isn't fully guaranteed or received yet.
Operational efficiency
Addressing settlement gaps
The proposal comes after the Association of Mutual Funds in India (AMFI) highlighted that differences in settlement timelines across markets often create temporary funding gaps during the trading day. For example, a fund may need to complete equity purchase settlements in the morning while proceeds from debt sales are received later. Such timing mismatches can also occur in overseas investments involving multiple currencies and time zones.
Market implications
Potential benefits of the proposal
The proposal could cut down the need for mutual funds to maintain large cash buffers to manage temporary settlement gaps. This would allow a larger portion of investor money to stay invested in the market, potentially improving portfolio efficiency and returns over time. However, SEBI has clarified that any overnight borrowing would still have to comply with existing regulations, including the cap limiting borrowing to 20% of a scheme's net assets.