Securities and Exchange Board of India (SEBI) has introduced new rules allowing mutual funds to use intraday borrowing to manage short-term cash flow issues.
The rule will come into effect from April 1, 2026, along with the implementation of the SEBI (Mutual Funds) Regulations, 2026.
The move aims to help mutual funds handle situations where money going out and money coming in do not match during the day.
This timing mismatch often happens in certain schemes, especially liquid and overnight funds.
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Why Mutual Funds Need Intraday Borrowing
In many cases, investors receive redemption payments in the morning on the next working day (T+1).
However, mutual funds may receive their maturity proceeds from investments such as TREPS or reverse repo only in the evening of the same day.
Because of this gap, mutual funds sometimes face a temporary shortage of funds.
To handle this situation, they may borrow money for a few hours during the day from financial institutions like banks.
This borrowing is only meant to bridge the short-term gap and ensure investors receive their payments on time.
SEBI Sets Strict Limits and Conditions
SEBI has made it clear that intraday borrowing can be used only for specific purposes, such as:
Repurchase or redemption of mutual fund units
Payment of interest to investors
Income Distribution cum Capital Withdrawal payouts
The borrowing amount cannot exceed the receivables expected on the same day from trusted institutions like the Government of India, Reserve Bank of India, and the Clearing Corporation of India.
Eligible receivables may include maturity proceeds from TREPS, reverse repo transactions, government securities, treasury bills, and similar financial instruments.
Responsibility of Asset Management Companies
SEBI has also asked Asset Management Companies (AMCs) to create clear internal policies before using this facility.
These policies must be approved by both the AMC board and the board of trustees and published on the company’s website.
Importantly, any cost or loss from intraday borrowing must be borne by the AMC itself, not by investors. This ensures that investors remain protected.
Special Rule for Index Funds and ETFs
SEBI has also clarified rules for equity-oriented index funds and exchange-traded funds (ETFs).
These funds may borrow money only in limited situations, such as when sell trades are not fully executed on stock exchanges.
In such cases, borrowing is allowed only for participating in the Closing Auction Session in the equity cash segment of stock exchanges.
This rule will come into effect on August 3, 2026.
Overall, SEBI says the new rules are designed to protect investors and ensure the smooth functioning of the securities market.