SEBI Moves to Relax Rules on Intraday Borrowing for Mutual Funds

SEBI Proposes Relaxation of Intraday Borrowing Rules for Mutual Funds

The Securities and Exchange Board of India (SEBI) has proposed a significant change in the rules governing intraday borrowing for mutual fund companies. The regulator is considering allowing mutual funds to use short-term intraday borrowing more freely to manage daily cash flow needs.

Under the current rules, mutual funds were allowed to use intraday borrowing mainly for paying redemption money to investors using certain guaranteed sources of cash. However, SEBI is now considering allowing this facility for more purposes, such as paying for forex and derivatives trades, and other day-to-day cash needs of mutual funds. This relaxation is aimed at helping mutual funds manage their daily cash needs more efficiently.

According to a SEBI paper, the regulator is proposing to allow asset management companies (AMCs) to avail intraday borrowings for purposes other than redemption payouts. Additionally, SEBI is considering allowing funds to borrow even if they do not yet have confirmed incoming money during the day. However, it is crucial to note that all intraday loans must be fully repaid by the end of the same day. If not repaid, they will be treated as regular borrowing, which has limits like up to 20 percent of fund size and time limits.

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

The cost of borrowing must be borne by the fund company, not investors. This relaxation is aimed at helping mutual funds manage temporary cash gaps that arise during the day due to timing differences in settlements across different asset classes and instruments.

Why the Proposal?

Mutual funds often face a timing problem during the day. They must make payments early in the morning for things like buying stocks, bonds, or paying investors who redeem units. However, the money they are supposed to receive from selling investments or from maturing securities usually comes later in the day. To solve this, mutual funds take very short-term loans from banks during the day, known as intraday borrowing. This facility is essential for smooth operations, as highlighted by the Association of Mutual Funds in India (AMFI).

SEBI believes the proposed change could help mutual funds manage their daily cash needs more efficiently by reducing the need to sell investments too quickly, allowing smoother execution of buy and sell trades, and improving overall liquidity management during the day. At the same time, SEBI is being careful to ensure that this short-term borrowing facility remains strictly for temporary use and does not turn into risky or excessive borrowing that could affect the safety and stability of mutual fund operations.

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

Public Comments Invited

SEBI has invited public comments on the proposal by June 3, 2026. This is a critical step in the regulatory process, and the regulator will carefully consider the feedback received before taking a final decision on the proposal.