Markets regulator Sebi has proposed allowing mutual fund schemes to settle their fund obligations on a net basis for certain cash-market transactions, a move aimed at easing temporary liquidity pressures and improving settlement efficiency.
Under the proposal, mutual funds would be allowed to net funds for outright purchase or sale transactions in a security during the same settlement cycle. However, the settlement of securities would continue on a gross and delivery-based basis.
How the proposed netting will work
At present, mutual fund schemes have to arrange funds separately for their purchase obligations, even when they are also expecting money from sale transactions during the same settlement cycle. This can create a temporary funding requirement and put pressure on the scheme’s liquidity.
For example, if a scheme has an outright purchase of securities worth Rs 1,000 and an outright sale worth Rs 2,000, the two fund obligations could be netted under the proposed framework. However, if the same security is both bought and sold during the same settlement cycle, those transactions would not qualify for netting and would continue to be settled on a gross basis.
Sebi has also made it clear that the proposal is only for fund settlement. The actual securities would continue to be delivered and settled on a gross basis. Securities Transaction Tax (STT) and stamp duty would also continue to apply on a delivery basis.
Let’s understand this with a simple illustration:
Suppose a mutual fund scheme makes these trades today:
– It buys shares worth Rs 1,000
– It sells shares worth Rs 2,000
Under the current system — Gross settlement
The fund has to handle both transactions separately:
Buy: Pay Rs 1,000
Sell: Receive Rs 2,000
So it may need to arrange Rs 1,000 first, even though it is going to receive Rs 2,000 from the sale.
Under SEBI’s proposed system — Net settlement
The two amounts can be adjusted:
Rs 2,000 (sale) − Rs 1,000 (purchase) = Rs 1,000
So the fund only has a net Rs 1,000 cash inflow.
Relief during index rebalancing
The proposed change could be particularly useful on days of index rebalancing, when passive mutual funds may need to make large portfolio changes. Large subscriptions and redemptions can also increase the temporary funding needs of schemes.
Sebi said the existing system can result in avoidable liquidity deployment when purchase obligations and sale receivables arise in the same settlement cycle. The proposed framework is intended to reduce such temporary funding requirements and could also lower mutual funds’ reliance on intraday borrowing for settlement purposes.
No netting between different schemes
The proposed facility would be available only at the individual scheme level. A mutual fund would not be allowed to offset the obligations of one scheme against those of another.
The Asset Management Company (AMC) and custodian would have to ensure that netting does not affect scheme-wise accounting, valuation, daily Net Asset Value (NAV) calculation, segregation of assets or investor interests. Cross-scheme funding or adjustment would also remain prohibited.
The proposal follows Sebi’s decision in April 2026 to allow a similar net settlement of funds for outright cash-market transactions by Foreign Portfolio Investors (FPIs), while retaining gross settlement of securities.
AMFI to frame implementation standards
Sebi has proposed that the Association of Mutual Funds in India (AMFI) formulate implementation standards in consultation with custodians, clearing corporations, stock exchanges and other stakeholders.
These standards would cover areas such as trade confirmation, reporting, reconciliation, audit trails and handling of rejected or unconfirmed trades.
