Market regulator Sebi has proposed relaxing the rules for intraday borrowing by mutual funds. This would allow asset management companies (AMCs) to use short-term borrowing not just for paying investors who redeem their units, but also for other day-to-day cash management needs.
Sebi released the proposal through a consultation paper on May 13 and has invited public comments till June 3, 2026.
What Sebi Has Proposed
Sebi has proposed allowing mutual fund companies to use intraday borrowing for more purposes than just paying investors who redeem their units.
Under the proposal, AMCs would be able to use short-term borrowing for day-to-day operational needs such as trade settlements, forex transactions, derivative-related payments and repayment of existing borrowings.
In the consultation paper, Sebi said, “AMCs may be allowed to avail intraday borrowings also for the purposes other than redemption/ unitholder payouts.”
The regulator has also proposed allowing mutual funds to borrow amounts higher than their expected inflows or receivables during the day, whether those receivables are guaranteed or not. However, AMCs will be required to fully repay the borrowings by the end of the same day.
Sebi said that if mutual funds fail to repay intraday borrowings on the same day and carry them overnight, they will have to follow the existing borrowing rules for mutual funds.
Under current regulations, mutual funds cannot borrow more than 20 percent of a scheme’s net assets, and they cannot keep such borrowings for more than six months.
The regulator also said AMCs will have to bear any cost or charges related to intraday borrowing, not investors.
Why Sebi Came Out With The Proposal
Sebi came out with the proposal after the Association of Mutual Funds in India (Amfi) highlighted operational issues faced by mutual funds in managing short-term cash needs during the day.
According to Sebi, mutual funds often face a timing gap between payments they need to make and money they receive during the trading day.
For example, fund houses may have to pay for stock or bond purchases early in the morning, while money from sales, maturity proceeds or Tri-Party Repo Dealing System (Treps) investments usually comes later in the day.
Because of this mismatch, mutual funds use short-term intraday borrowing to manage temporary cash shortages. Sebi said the “intraday borrowing facility acts as a cash flow management tool for mutual funds.”
Amfi told Sebi that mutual funds use intraday borrowing not just for redemption payouts, but also for meeting trade settlement obligations, forex settlements, derivative margin and mark-to-market (MTM) requirements, and repayment of existing borrowings.
The regulator said mutual funds often process investor redemption payments early in the morning, while money from sales, maturities and other receivables comes later in the day, creating temporary cash shortages for schemes.
Earlier Rules Were Narrower
Sebi had earlier allowed mutual funds to use intraday borrowing from April 1, 2026, mainly to manage timing gaps between investor redemption payouts and guaranteed inflows from entities such as the Government of India, Reserve Bank of India (RBI) and Clearing Corporation of India Ltd (CCIL).
However, after Amfi and mutual fund companies raised operational concerns, Sebi postponed the implementation of the intraday borrowing rules till July 15, 2026.
Through the latest consultation paper, the regulator now wants to widen the scope of intraday borrowing and recognise it as a broader cash management tool for mutual funds.
How Timing Mismatches Affect Mutual Funds
According to the regulator, limited flexibility in intraday borrowing can affect both fund management and scheme returns.
Sebi explained that mutual funds often have to make payments before market cut-off timings, while money from sales or other receivables usually comes later in the evening. Because of this delay, fund houses may not be able to use incoming funds efficiently, which could impact scheme returns.
Sebi also said fund managers may face difficulties in executing buy and sell trades on the same day if they do not have enough short-term liquidity during market hours.
According to the regulator, the proposed changes could help mutual funds manage daily cash needs more smoothly while keeping safeguards in place to prevent excessive borrowing.
