SEBI’s new intraday borrowing framework for mutual funds: scope, conditions and safeguards

The Securities and Exchange Board of India has proposed an expanded framework to recognize intraday borrowings as a formal cash management tool for mutual funds. This is sought to be implemented by amending Regulation 42 of the SEBI (Mutual Funds) Regulations, 2026. The move is intended to ease intraday liquidity pressures arising from settlement timing mismatches, while keeping strict guardrails to prevent leverage and protect investors.

Under the proposal, mutual fund schemes would be able to utilize intraday borrowing lines not only for redemption and unitholder payouts, but also for broader settlement and liquidity needs, including pay‑in obligations, forex settlements, derivative margins and MTM payments, and repayment of existing borrowings. Importantly, such intraday borrowing could be backed by both guaranteed and non‑guaranteed receivables, subject to conditions and regulatory limits.

1. Policy objective and proposed regulatory change

1.1 Objective of the SEBI memorandum

The primary intent behind the Board Memorandum is to formally recognize intraday borrowing as a cash flow management tool for mutual funds, rather than treating it only as an exceptional measure for redemptions.

SEBI proposes to amend Regulation 42 of the SEBI (Mutual Funds) Regulations, 2026 to explicitly allow mutual funds to draw intraday credit lines for addressing timing differences in:

  • Pay‑in and pay‑out settlements within and across asset classes
  • Forex transactions and related settlements
  • Payments towards existing borrowing obligations
  • Margin and MTM obligations on derivative positions

This would be in addition to the already permitted use of borrowing for meeting unitholder‑related payouts (such as redemption proceeds and Income Distribution cum Capital Withdrawal payouts). All such usage would, however, be subject to clearly prescribed safeguards.

1.2 Existing borrowing framework under Regulation 42

Currently, Regulation 42 of the SEBI (Mutual Funds) Regulations, 2026 sets out the following regime for borrowing by mutual funds:

  1. Mutual funds are prohibited from borrowing except to meet temporary liquidity needs for:

    • Repurchase or redemption of units
    • Payment of interest
    • Income Distribution cum Capital Withdrawal payout to unitholders
    • Settlement of trades by equity oriented index funds and equity oriented exchange traded funds on account of under‑execution of sell trades on the stock exchange (as may be specified by SEBI from time to time)

  2. Such borrowings are subject to:

    • A cap of twenty per cent of the net assets of the scheme, and
    • A maximum duration of six months for such borrowings.

  3. A special carve‑out already exists under sub‑regulation (2):

    The limit specified at clause (a) of sub‑regulation (1) shall not be applicable for intraday borrowing subject to such conditions as may be specified by the board.

The present proposal seeks to flesh out the scope and conditions for this intraday borrowing carve‑out, and to extend the purposes for which it may be used.

2. Regulatory background and earlier carve‑out for intraday borrowing

2.1 Carve‑out created based on AMFI representation

The Association of Mutual Funds in India (AMFI) had earlier approached SEBI to permit intraday borrowing for schemes facing a gap between:

  • Redemption and unitholder pay‑outs that must be processed early in the day; and
  • Guaranteed receivables due the same day from entities such as Government of India (GoI), Reserve Bank of India (RBI) and Clearing Corporation of India Limited (CCIL).

Accepting this rationale, SEBI amended Regulation 42 (effective 1 April 2026) to exclude intraday borrowing from the 20% net asset cap, creating a regulatory carve‑out. The Board had approved this in its meeting on 17 December 2025, recognizing that:

  • Intraday borrowings are mainly used in the early morning to honour redemption and other pay‑outs to investors.
  • The extent of such intraday borrowing was originally limited to the amount of guaranteed receivables from RBI and CCIL.

2.2 Subsequent circular and temporary deferral

Following the amendment, SEBI also issued a circular dated 13 March 2026 specifying operational norms and safeguards for intraday borrowings.

However, mutual funds and AMFI raised several operational concerns regarding implementation, leading SEBI to defer the applicability of these intraday borrowing guidelines until 15 July 2026. This deferral created the necessity to revisit and broaden the framework in consultation with industry stakeholders.

3. How mutual funds are currently using intraday borrowing

3.1 Intraday liquidity needs and cash management

In its revised submission, AMFI highlighted that mutual funds already use intraday borrowing from banks as a crucial intraday liquidity bridge, arising from timing mismatches between:

  • Outflows from a scheme (e.g., redemption payouts, trade pay‑ins), and
  • Inflows such as pay‑out receivables, maturity proceeds and other settlements.

Funds typically draw intraday credit in the early hours of the day to ensure all payout and pay‑in obligations are honoured on time, and then repay this borrowing by using scheme receivables that arrive during the day. This makes intraday borrowing a short‑cycle cash flow management instrument, rather than a medium‑term funding source.

3.2 Illustrative settlement mismatch scenarios

AMFI submitted a set of examples (summarized here) demonstrating how settlement cycles and timing mismatches arise across different scheme categories.

  1. Equity scheme

    • Cash parked in TREPS – Rs. 200 crore; funds realized post 5 p.m.
    • Equity purchases – Rs. 400 crore; T+1 settlement with pay‑in required by around 10 a.m.
    • Equity sales – Rs. 500 crore; T+1 settlement with funds received in the evening (after 4 p.m.).

  2. Debt scheme

    • Cash in TREPS – Rs. 200 crore; realized post 5 p.m.
    • Corporate bond primary purchase via EBP – Rs. 400 crore; T+1 settlement with pay‑in by around 10 a.m.
    • Corporate bond secondary sale via NSCCL – Rs. 500 crore; funds trickle in over the course of the day.

  3. Hybrid scheme

    • Cash in TREPS – Rs.