Sebi Removes Intraday Borrowing Limit For Mutual Funds

The Securities and Exchange Board of India (Sebi) has formalised an intraday borrowing framework for mutual funds and has removed the upper limit to borrow funds intraday in order to manage any mismatches in liquidity. The framework also mandated board approval and disclosures for mutual funds for intraday borrowing from banks and other financial institutions.

The circular issued on March 13 noted that while the 20 per cent borrowing limit for funds taken for a day up to six months was unchanged, this limit will now not apply for intraday borrowings. Mutual funds are allowed to borrow 20 per cent of the net assets of a scheme.

Currently, redemption payouts for liquid and overnight schemes are processed on the morning of T+1. Mutual fund schemes receive the proceeds from TREPS (Triparty Repo in Government Securities) and reverse repo on the evenings of the T+1 day. This creates a mismatch in liquidity for mutual funds. Hence, Sebi has allowed mutual funds to formally borrow intraday to bridge this mismatch.

Sebi said that from the month of April, mutual funds need to have a policy for using the intraday borrowing facility, which must be approved by the board of the asset management company and the trustees. Such policies must be disclosed on the website of the mutual fund.

The regulator said that intraday borrowings must only be used for repurchasing and redeeming units or for paying interest or income distribution cum capital withdrawal pay-out to unitholders. Sebi also said that this borrowing should not exceed guaranteed receivables due on the same day. Such receivables include proceeds from TREPS, reverse repo transactions, government securities, treasury bills, state development loans, and interest payments on government securities.

Sebi said that the AMC must bear the cost of intraday borrowings, and any losses arising from delays in receivables should not be passed on to investors.

Sebi also said that borrowing by equity-oriented index funds and exchange-traded funds, if sell trades are not executed, will only be permitted for participation in the closing auction session in the equity cash segment. This mechanism will become operational on August 3, 2026.