SEBI circular on Intraday Borrowing Facility for Mutual Funds

SEBI Circular on Intraday Borrowing Facility for Mutual Funds

On 10 July 2026, the Securities and Exchange Board of India issued a circular introducing a formal framework for intraday borrowing by mutual funds. The circular follows the amendment made to the SEBI (Mutual Funds) Regulations, 2026 on 3 July 2026.

The new framework will become effective from 1 September 2026.

Why was this circular issued?

Mutual funds often face temporary liquidity mismatches because:

• Investors may redeem units before all sale proceeds are credited.
• Market settlements occur at different times during the day.
• Foreign market settlements and mark-to-market (MTM) obligations may require immediate payments.

Earlier, mutual funds could borrow only in limited situations under Regulation 42. Now, SEBI has specifically permitted intraday borrowing, allowing funds to borrow for a few hours during the same business day to meet temporary cash-flow requirements.

The objective is to ensure:

• Timely payment to investors.
• Smooth settlement of securities transactions.
• Better liquidity management without affecting investors.

What is Intraday Borrowing?

Intraday borrowing means borrowing money only for the same trading/business day.

The borrowing must normally be repaid before the end of the day.

It is not intended as a regular loan or a source of long-term funding.

Permitted purposes of intraday borrowing

SEBI has allowed mutual funds to use intraday borrowing only for specific purposes.

1. Unitholder payouts

The borrowing may be used for payments such as:

• Redemption proceeds
• IDCW (Income Distribution cum Capital Withdrawal) payouts
• Interest payments
• Other investor payments

Example: A scheme has to pay ₹100 crore to investors today, but redemption proceeds from securities will arrive later in the afternoon.
The AMC may borrow the amount temporarily and repay it once the funds are received.

2. Pay-in for investments

Where the mutual fund has purchased securities and must make settlement payment before receiving incoming funds.

Example:

• Purchase settlement due at 11:00 AM.
• Sale proceeds expected at 3:00 PM.

The scheme may borrow for those few hours.

3. MTM obligations and foreign exchange settlements

Borrowing is also permitted for:

• Mark-to-Market margin obligations
• Foreign exchange settlement obligations

This ensures no settlement defaults occur due to timing differences.

4. Repayment of existing borrowings

Intraday borrowing may also be used for repaying an existing borrowing where required during the day.

Limits on borrowing

SEBI has linked borrowing limits with expected receivables.

A. Guaranteed receivables

Borrowing may be based on receivables that are almost certain to be received.

Examples include:

• RBI payments
• Clearing Corporation settlements
• Subscription money already credited into scheme bank accounts

These are considered highly reliable cash inflows.

B. Non-guaranteed receivables

Borrowing can also be backed by receivables expected during the day, such as:

• Maturity proceeds of securities
• NCD settlements
• Commercial Paper (CP)
• Certificates of Deposit (CD)
• OTC swap settlements

Although these are expected, they are not guaranteed until actually received.

C. Additional borrowing for investor payouts

SEBI has also permitted AMCs to borrow beyond the above receivables only for making redemption and other payments to investors, as allowed under Regulation 42(1).

This ensures investors receive money on time.

Repayment requirement

The AMC must ensure:

• Intraday borrowing is repaid before the end of the day.

If repayment is not possible, the borrowing becomes an overnight borrowing, which must satisfy the normal borrowing conditions prescribed under Regulation 42.

Board-approved policy mandatory

Every AMC must prepare a formal policy covering:

• Approval process
• Monitoring mechanism
• Risk controls
• Operational framework

The policy must be:

• Approved by the AMC Board.
• Approved by the Trustees.
• Published on the AMC’s website.

Record-keeping requirement

AMCs must maintain scheme-wise records showing:

• Reason for the liquidity mismatch.
• Amount borrowed.
• Expected source of repayment.
• Timing of repayment.

This will help SEBI during inspections and audits.

Compliance with existing regulations

The circular does not replace other prudential requirements.

AMCs must continue complying with:

• Clauses 6 and 7 of the Fourth Schedule to the SEBI (Mutual Funds) Regulations, 2026.
• Paragraph 17.7 of the SEBI Master Circular for Mutual Funds.

Who bears the borrowing cost?

One of the most important investor protection measures is that investors will not bear the cost.

SEBI has clarified that:

• The Asset Management Company (AMC) must bear the entire cost of intraday borrowing.
• If there is any delay in receiving expected receivables resulting in additional cost or loss, the AMC must bear that loss as well.

This prevents any dilution of investors’ returns due to operational liquidity management.

Effective date: The circular comes into force from: 1 September 2026

Key takeaways

Practical impact

This circular provides greater operational flexibility to mutual funds while strengthening investor protection. By allowing short-term intraday borrowing to bridge settlement timing gaps, SEBI aims to reduce the risk of payment delays, improve settlement efficiency, and maintain orderly fund operations. At the same time, strict conditions—such as same-day repayment, board-approved policies, detailed record-keeping, and requiring the AMC to absorb all borrowing costs—ensure that the facility is used only for genuine liquidity management and not as a source of leverage or at the expense of investors.

Circular

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