SEBI Allows Mutual Funds to Net Cash Market Obligations from April

SEBI’s Settlement Rule Seeks to Ease Mutual Funds’ Cash-Flow Needs

A scheme-level netting facility could reduce temporary funding needs, while leaving securities settlement and key transaction safeguards unchanged.

A narrower cash obligation, not a change to securities settlement

SEBI’s decision gives mutual fund schemes permission to net eligible payment and receipt obligations arising from outright purchases and sales in the cash segment. In practical terms, a scheme’s funds payable can be offset against its funds receivable, provided both arise within that individual scheme and the same settlement cycle.

The distinction between funds and securities is central. The regulator has allowed netting only of fund obligations; settlement of the securities themselves will continue on a gross basis. The change is therefore aimed at the cash needed to complete eligible transactions, rather than altering how securities are delivered or settled.

SEBI’s stated objectives are to reduce temporary funding requirements and improve operational and settlement efficiency. For fund managers and their operational teams, less cash may need to be arranged temporarily when eligible purchases and sales generate offsetting obligations. The scale of any benefit will depend on the transactions a scheme undertakes and how the framework is implemented.

Scheme boundaries and transaction exclusions remain important

The facility cannot be used to combine obligations across different schemes belonging to the same mutual fund. That restriction makes the scheme—not the asset manager as a whole—the unit for net settlement. It also means that a payable in one scheme cannot be offset by a receivable held in another.

There is a further restriction when a scheme buys and sells the same security during one settlement cycle: those transactions will not qualify for net settlement and will remain subject to gross settlement. Derivatives, securities lending and borrowing, short-selling-related transactions and other transactions not specifically covered are also outside the framework.

These limits define the facility’s reach. It is not a general licence to consolidate every cash-market or investment-related obligation, and transactions must meet the regulator’s conditions to benefit.

Operational controls will determine how the framework works

SEBI has asked the Association of Mutual Funds in India to formulate implementation standards in consultation with clearing corporations, stock exchanges, custodians and other stakeholders. This work will be important in translating the permitted netting into consistent processes across the parties involved in settlement.

Asset management companies and custodians must establish adequate systems and controls for scheme-wise accounting, maintain audit trails and prevent cross-scheme adjustment. Those requirements are not incidental: accurate records are necessary to show that only eligible obligations have been offset and that each scheme’s transactions remain separately accounted for.

The framework takes effect on April 1, 2027, leaving implementation standards and operational readiness as key steps before use. Investors may see this as a process change intended to improve cash settlement efficiency, but the announcement does not itself indicate a change in a scheme’s investment strategy or promise a particular effect on returns.

Key Highlights

• Eligible fund payables and receivables can be offset within the same scheme and settlement cycle.
• The facility covers outright cash-market transactions, subject to SEBI’s conditions.
• Securities settlement remains gross; only fund obligations may be netted.
• Cross-scheme adjustments and same-security buy-and-sell transactions in the same cycle are not eligible.
• Derivatives, securities lending and borrowing, and short-selling-related transactions remain outside the framework.
• The rules take effect on April 1, 2027, with implementation standards to be developed by AMFI in consultation with market participants.

Investor Note: The change is principally an operational settlement measure, not a direct signal about mutual fund performance. Investors should watch how implementation standards preserve scheme-level accounting and controls, while judging funds on their investment objectives and performance rather than assuming that netting will alter returns.