SEBI may ease borrowing rules to give mutual funds more flexibility in managing cash

India’s market watchdog is moving to relax borrowing rules for mutual funds, while also granting more time for the rollout of the existing framework after industry participants flagged execution challenges. The proposal signals a shift toward giving fund houses greater flexibility in managing short-term liquidity.

The Securities and Exchange Board of India is now looking to widen the scope of intraday borrowing, repositioning it from a narrowly defined facility into a broader cash management tool. When it was first introduced earlier this year, the mechanism was intended mainly to help asset managers bridge temporary gaps between redemption payouts and receivables due within the same trading day.

Following feedback from the industry, the regulator has deferred the implementation of these norms to July 15, acknowledging operational concerns around the current structure. At the same time, it is exploring a more expansive framework that would allow mutual funds to tap intraday borrowing for multiple purposes, including meeting trade settlement obligations, handling foreign exchange transactions, and managing margin requirements in derivatives, along with other short-term liquidity needs.

In a further easing, SEBI has proposed removing the requirement that such borrowings must be backed by assured inflows like payments from the government or clearing corporations. Mutual funds may also be allowed to borrow amounts exceeding expected inflows during the day, provided the positions are fully squared off before the close of business.

However, the regulator has made it clear that any borrowing that extends beyond the same day will continue to be governed by existing limits. These include a cap of 20% of a scheme’s net assets and a maximum borrowing tenure of six months, ensuring that while flexibility is enhanced intraday, overall risk exposure remains contained.