Mutual funds will be permitted to use intraday borrowings for a broader variety of liquidity management objectives starting on September 1 after the market regulator SEBI released a circular operationalising revisions to the SEBI (Mutual Funds) Regulations, 2026.
The objective of the action is to assist mutual fund schemes in managing short-term liquidity mismatches caused by variations in market settlement time without having an impact on investors.
Under the new structure, mutual funds may use intraday borrowings in order to cover unitholder pay-outs, such as redemptions, income distribution-cum-capital withdrawal pay-outs and interest payments.
In addition, the facility can be used for mark-to-market obligations, foreign exchange settlements, repayment of existing borrowings, and pay-ins associated with investments made through schemes.
However, SEBI has capped the amount that can be borrowed. Guaranteed receivables, such as inflows from the Reserve Bank of India, clearing companies, and subscription funds received in scheme bank accounts, can support intraday borrowings.
Moreover, funds can borrow against non-guaranteed receivables that are anticipated to be received by the end of the day, such as settlement inflows and maturity proceeds from instruments like commercial papers, non-convertible debentures, certificates of deposit and over-the-counter swaps.
Additionally, asset management firms may only use intraday borrowings above these receivables to fulfill investor payouts and redemption requests that are allowed under the SEBI Mutual Funds Regulations, 2026.
According to the regulator, asset management companies (AMCs) would be in charge of making sure that all intraday borrowings are paid back by the completion of the trading day.
Any borrowing that extends into an overnight loan must adhere to the current regulatory restrictions and allowable uses.
Above all else, SEBI has stated that the AMC cannot pass on to investors the cost of intraday borrowings or any losses resulting from unexpected problems or delays in collecting anticipated cash. The circular will take effect on September 1, 2026.
A policy controlling the use of intraday borrowings must be approved by the trustees of mutual funds and the boards of AMCs in order to improve governance. The AMC’s website must also reveal the policy, which covers approval procedures and monitoring systems.
Also, AMCs will need to keep scheme-specific documents outlining the planned source of repayment as well as the liquidity mismatch that required the borrowing.
