New Delhi, March 13 The securities regulator, Sebi, issued guidelines on Friday for mutual funds to engage in intraday borrowing arrangements with financial institutions such as banks.
Under the new framework, the board of an asset management company (AMC) as well as the board of trustees will be required to approve a policy governing the use of intraday borrowing facilities.
Furthermore, the AMC will also disclose the approved policy on its website, Sebi said in its circular.
Sebi stated that intraday borrowings can only be used for specific purposes – the repurchase or redemption of units, the payment of interest or Income Distribution-cum-Capital Withdrawal (IDCW) payouts to unit holders.
The regulator also stipulated that the borrowing amount cannot exceed the "guaranteed receivables" expected on the same day.
Receivables eligible for such intraday borrowings include maturity proceeds from TREPS (Triparty Repo in Government Securities), proceeds from reverse repo transactions, maturity proceeds from government securities such as G-Secs, Treasury Bills, State Development Loans (SDLs) and STRIPS, interest payments on G-Secs and SDLs, as well as the sale proceeds of these securities.
These conditions will apply to intraday borrowings by mutual funds from April 1, 2026, Sebi said.
Sebi noted that, as per prevailing industry practice, primarily in liquid and overnight schemes, redemption payouts to investors are processed in the morning hours of the T+1 day, while maturity proceeds from TREPS and reverse repo transactions are typically received in the evening of the same day.
To bridge this intraday timing mismatch between inflows and outflows, mutual funds enter into formal intraday borrowing arrangements with banks and other financial institutions.
The regulator had earlier notified the Sebi (Mutual Funds) Regulations, 2026 in January, which will come into force from April 1, 2026.
Regulation 42(1) permits mutual funds to borrow funds for purposes such as unit repurchase or redemption, interest payment or IDCW payouts to unitholders, or settlement of trades by equity-oriented index funds and equity-oriented exchange traded funds (ETFs) when sell trades on stock exchanges are under-executed. Such borrowings are capped at 20 per cent of a scheme's net assets and cannot exceed six months.
However, under Regulation 42(2), this 20 per cent limit will not apply to intraday borrowings, provided they comply with the conditions specified by Sebi.
The regulator also clarified that any borrowing costs or losses arising from delays in receiving expected funds must be borne by the AMC and not the mutual fund scheme.
Furthermore, Sebi said that borrowing by equity-oriented index funds and equity-oriented ETFs due to under-execution of sell trades will be permitted only for participation in the Closing Auction Session in the equity cash segment of stock exchanges.
Sebi is set to introduce the Closing Auction Session in the equity cash segment on stock exchanges from August 3.