The capital markets regulator SEBI has proposed to allow mutual fund schemes to net their fund obligations arising from certain cash-market transactions, a move aimed at reducing temporary liquidity requirements and improving settlement efficiency.
Under the consultation paper issued on Thursday, SEBI has invited public comments until September 24, 2026, on allowing net settlement of funds for outright transactions carried out by mutual fund (MF) schemes on recognised stock exchanges. However, securities would continue to be settled on a gross and delivery-backed basis. 24, 2026.
Fund Crunch
At present, mutual fund schemes are required to meet purchase and sale obligations on a gross basis. This means that a scheme must arrange funds for purchases independently of the sale proceeds receivable during the same settlement cycle, even when the two sets of transactions effectively offset each other.
For instance, if a mutual fund scheme purchases securities worth ₹100 crore and sells securities worth ₹90 crore in the same settlement cycle, it currently has to separately fund the entire purchase obligation despite being entitled to receive the sale proceeds. Under SEBI’s proposed net settlement mechanism, the fund would only need to meet the net cash obligation of ₹10 crore, thereby easing temporary liquidity pressures and improving settlement efficiency.
SEBI said the existing arrangement created temporary liquidity pressures, operational inefficiencies and reliance on short-term funding.
These pressures can become more significant during periods of index rebalancing, when passive funds need to make large portfolio adjustments, as well as during periods of substantial investor subscriptions and redemptions, said SEBI.
Outright Netting
The proposed framework would allow netting only for outright transactions. An outright transaction would mean either a purchase or a sale of a particular security, but not both, during the same settlement cycle.
Thus, purchases and sales in different securities could be netted for the purpose of determining the fund obligation. However, where a mutual fund both buys and sells the same security during the settlement cycle, those transactions would be treated as non-outright and excluded from netting. They would continue to be settled on a gross basis.
Importantly, the proposed change applies only to fund settlement. Settlement of securities would continue on a gross basis, preserving the delivery-backed nature of institutional transactions. Securities Transaction Tax and stamp duty would also continue to apply on a delivery basis, where applicable.
Netting would also be restricted to the individual MF scheme. SEBI has proposed that there should be no adjustment of obligations between different schemes of the same MF or asset management company. AMCs and custodians would have to ensure that scheme-wise accounting, daily NAV computation, asset segregation, investment limits and unit-holder interests remain unaffected.
SEBI said the proposal follows its April decision to permit a similar net settlement of funds for outright cash-market transactions undertaken by FPIs (foreign portfolio investors).
The regulator said the proposed framework could reduce the extent of intraday borrowing by MFs for settlement purposes. The Association of Mutual Funds in India would develop implementation standards for reconciliation, reporting, rejected trades, audit trails, and scheme-level controls, in consultation with market infrastructure institutions and custodians.