SEBI's Intraday Borrowing Consultation Paper Proposal: Implications for Mutual Funds

SEBI Proposes Changes to Intraday Borrowing Rules for Mutual Funds

The Securities and Exchange Board of India (SEBI) has released a consultation paper on May 13, proposing changes to the rules governing intraday borrowing for mutual funds. The proposal aims to provide mutual funds with greater flexibility in managing daily cash flows and timing gaps in settlements.

What is Intraday Borrowing?

Intraday borrowing refers to short-term borrowing that is taken and repaid within the same trading day. For mutual funds, it acts as a temporary funding bridge when money has to be paid out before incoming funds are received. For example, a mutual fund may need to pay for equity purchases or investor redemptions in the morning, while proceeds from bond sales or other investments may arrive only later in the day.

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The Proposal

SEBI has proposed allowing mutual funds to use intraday borrowing facilities for purposes such as trade settlements, forex obligations, and derivative margin payments, apart from redemption-related payouts. Currently, intraday borrowing is mainly linked to guaranteed receivables from institutions such as the Government of India, the Reserve Bank of India, and the Clearing Corporation of India Limited. The proposal also considers allowing mutual funds to borrow more freely during the day, even if the incoming money is not fully guaranteed or has not yet been received.

Comparison of Intraday Borrowing Purposes

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Why SEBI is Considering the Change

The proposal follows representations from the Association of Mutual Funds in India (AMFI), which said 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 only later in the day.

Impact on Fund Operations

The proposal could reduce the need for mutual funds to maintain large cash buffers to manage temporary settlement gaps. According to Praveen Shankaran, Chief Operating Officer at KFin Technologies, lower unused cash holdings would allow a larger portion of investor money to remain invested in the market, potentially improving portfolio efficiency and returns over time.

Risks and Considerations

While the proposal could improve operational flexibility, it may also increase exposure to settlement and liquidity risks. Shankaran said delays in settlements or counterparty failures could create pressure on asset management companies (AMCs) if intraday borrowings cannot be closed out within the same day.

Public Comments

SEBI has invited public comments on the proposals until June 3, 2026.

Impact on Investors and Markets

By expanding intraday liquidity tools, SEBI is trying to make fund operations smoother and reduce friction caused by settlement timing mismatches. For investors, the changes could support smoother redemption processing and allow fund managers to keep a larger share of assets invested instead of parked in unused cash. Hybrid and multi-asset mutual funds are likely to benefit the most from the proposal because they frequently deal with different settlement timelines across equities, bonds, derivatives, and overseas investments, increasing the need for short-term liquidity during the trading day.