The Securities and Exchange Board of India (SEBI) has introduced a formal regulatory framework for intraday borrowings by mutual funds, bringing structure to a practice that was previously followed informally across the industry while adding safeguards to protect investors.
SEBI has also issued a circular allowing mutual funds to undertake intraday borrowing to manage temporary cash mismatches while processing investor redemptions. The move is aimed at ensuring smoother liquidity management without disrupting fund operations.
Under the new rules, mutual funds can undertake intraday borrowing only to meet investor redemption obligations, including repurchase of units, interest payments, or Income Distribution cum Capital Withdrawal (IDCW) payouts. The regulator clarified that such borrowing cannot be used for any other purposes.
Typically, mutual funds are allowed to borrow up to 20% of a scheme’s net assets for a maximum period of six months to meet requirements such as redemptions, income distribution, or settlement obligations. However, SEBI has clarified that this 20% limit will not apply to intraday borrowings, provided they meet the specified conditions.
As per the new framework, intraday borrowing will be permitted only against guaranteed receivables that are expected to be realised on the same day. These receivables must be from entities such as the Government of India, the Reserve Bank of India, or the Clearing Corporation of India Limited. The borrowing limit is directly linked to these receivables, effectively capping how much asset management companies (AMCs) can borrow within a day.
SEBI has also mandated that AMCs must establish a board-approved intraday borrowing policy outlining operational procedures, controls, and risk limits under which such borrowing can be undertaken.
Importantly, the regulator has clarified that any cost incurred from intraday borrowing must be borne by the AMC and cannot be passed on to investors. Even in cases where receivables are delayed, investors will remain protected from these costs, ensuring that short-term liquidity management does not impact investor returns.
Additionally, the framework permits exchange-traded funds (ETFs) and index funds to use intraday borrowing for participation in stock exchange closing auctions.
The new framework will come into effect from April 1, 2026 under the SEBI Mutual Fund Regulations, 2026.
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