SEBI Considers Broader Framework for Intraday Borrowing by Mutual Funds

India's Market Regulator Considers Easing Intraday Borrowing Rules for Mutual Funds

The Securities and Exchange Board of India (Sebi) is considering relaxing rules governing intraday borrowing by mutual funds, following representations from the asset management industry about operational challenges in complying with a tighter framework rolled out earlier this year.

According to a consultation paper issued on Wednesday, Sebi proposes to allow mutual funds to use intraday borrowing from banks not just for redemption payouts, but also for trade settlements, forex obligations, mark-to-market (MTM) of derivative positions, and other cash management needs.

This move comes after Sebi permitted mutual funds to borrow from banks on an intraday basis on 13 March to bridge timing mismatches between payouts and guaranteed same-day receivables such as proceeds from Treasury Bills Repurchases (TREPS), government securities, and clearing corporations. However, such borrowing was initially only allowed for redemption payouts.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

The framework, which was initially scheduled to take effect from 1 April, was later deferred to 15 July following representations from the Association of Mutual Funds in India (Amfi) and asset management companies (AMCs) regarding operational challenges. Amfi had made a representation to Sebi in April that intraday borrowing is often utilized for the purchase of securities during times of cash crunch during the day, leading to the deferment in implementation to July.

Sebi's draft paper acknowledges that intraday borrowing is already widely used by fund houses as a liquidity management tool because settlement cycles across asset classes often do not align. Equity and bond purchase obligations typically require pay-ins by 10 am, while receivables from sales or TREPS deployments may arrive only later in the day.

The regulator said restricting borrowing only to redemption payouts and guaranteed receivables could impair fund management flexibility and potentially hurt scheme returns. The fund manager's decision-making would be impacted due to the inability to make buy and sell trades during the same day.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

Sebi has sought public comments on the paper till 3 June. The proposal aims to help remove the timing mismatch issue in purchasing securities through the trading day when sales proceeds, maturity amounts, or TREPS are to be received the same day.