SEBI notifies crucial change enabling intraday borrowing by mutual funds

The Securities and Exchange Board of India has formally notified an important regulatory change that permits mutual funds to use intraday borrowing to bridge short-term timing differences between a scheme’s inflows and outflows. This relaxation has been introduced through the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2026 vide Notification No. SEBI/LAD-NRO/GN/2026/307 dated 3rd July, 2026.

The amendment modifies the existing borrowing framework under the Securities and Exchange Board of India (Mutual Funds) Regulations, 2026, with a focused objective of improving liquidity management at the scheme level, without altering the broader prudential discipline that applies to mutual funds.

Statutory basis and notification details

Enabling provisions under SEBI Act, 1992

The new regulatory change has been framed by SEBI in exercise of its powers under:

Section 30 of the SEBI Act, 1992, which empowers the Board to make regulations; read with
Section 11(2)(c) of the SEBI Act, 1992, which specifically authorises SEBI to regulate and register mutual funds and protect the interests of investors.

Using these enabling provisions, SEBI has brought in targeted amendments to the mutual fund regulatory framework.

Notification and commencement

Key formal aspects of the notification are as follows:

The regulations are titled:
"Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2026."
The notification categorically states that the amendment comes into force on the date of its publication in the Official Gazette. Accordingly, the effective date for compliance and operational implementation is the date on which the notification appears in the Gazette.
The notification also records that the principal Securities and Exchange Board of India (Mutual Funds) Regulations, 2026 were originally issued vide Notification No. SEBI/LAD-NRO/GN/2026/294 and published in the Gazette of India on 15th January, 2026.

Overview of the amendment to Regulation 42

Background – borrowing by mutual funds

Regulation 42 of Chapter VII of the Securities and Exchange Board of India (Mutual Funds) Regulations, 2026 governs the conditions and limits relating to borrowing by mutual fund schemes. The general policy under this framework has traditionally been conservative, permitting borrowing only in limited circumstances and subject to specific caps and conditions, mainly for meeting temporary liquidity needs.

Substitution of Regulation 42(2)

The amendment specifically replaces sub-regulation (2) of Regulation 42 with a new provision. The substituted text reads:

“(2) Nothing in sub-regulation (1) shall restrict the mutual funds from intraday borrowing for addressing timing mismatch between outflows and inflows of a scheme, subject to such conditions as specified by the Board.”

This change clarifies that, notwithstanding the restrictions or conditions laid down in Regulation 42(1), mutual funds are now expressly permitted to engage in intraday borrowing for the limited and defined purpose of managing timing mismatches between a scheme’s cash inflows and outflows, as long as they comply with any conditions that SEBI may prescribe.

Practical impact: what intraday borrowing means for mutual funds

Concept of intraday borrowing

Intraday borrowing refers to borrowing that is:

Availed and repaid within the same business day, and
Used purely for short-span cash management, without extending into overnight or longer-tenure borrowing.

Under the amended framework, a mutual fund scheme can tap such very short-term funding purely to align:

SEBI allows mutual funds to use intraday borrowing for managing liquidity gaps