“The proposal is intended to facilitate ease of doing business, improve settlement efficiency and reduce temporary liquidity requirements for mutual fund schemes, while ensuring that existing safeguards relating to delivery-based settlement, scheme-wise accounting, valuation and investor protection remain unaffected,” SEBI said in its consultation paper.
The proposal follows feedback from market participants that mutual fund schemes can face temporary liquidity pressures and operational inefficiencies because cash-market fund obligations are effectively settled on a gross basis at the scheme level.
The issue can become more pronounced during index rebalancing, when passive funds need to make portfolio changes, as well as during periods of large investor subscriptions or redemptions.
SEBI’s proposal follows its earlier move to allow net settlement of funds for Foreign Portfolio Investors (FPIs).
Under the proposed framework, net settlement would be permitted for outright buy or sell transactions undertaken by an individual mutual fund scheme in the cash market through a recognised stock exchange.
However, netting would be restricted to the individual scheme level. Mutual funds would not be allowed to net transactions across different schemes.
SEBI has also proposed safeguards to ensure that the framework does not affect scheme-wise accounting, valuation, daily net asset value (NAV) computation, segregation of securities and funds, or unit-holder interests. The asset management company (AMC) and custodian would be responsible for ensuring compliance.Where the value of outright sale transactions is lower than outright purchase transactions, the mutual fund scheme would have to fund the residual purchase obligation, along with purchase obligations arising from non-outright transactions.
Conversely, where outright sale transactions exceed outright purchases, the excess sale amount cannot be adjusted against purchase obligations arising from non-outright transactions, SEBI said.
The regulator has proposed that the Association of Mutual Funds in India (AMFI) formulate implementation standards in consultation with custodians, recognised clearing corporations, recognised stock exchanges and other stakeholders.
These standards could cover partially confirmed or rejected trades, file formats and reporting, reconciliation, exception handling, audit trails and scheme-level controls.
SEBI has invited public comments on the proposal until September 24.
