The Securities and Exchange Board of India (SEBI) has laid down conditions for intraday borrowings by mutual funds, stating that the facility will be allowed primarily to address short-term timing mismatches in fund flows and will come into effect from April 1, 2026. In a circular issued on Friday, the market regulator said the move follows the notification of the SEBI (Mutual Funds) Regulations, 2026, which will also take effect from April 1.
Explaining the need for such borrowings, SEBI said there is often a timing mismatch between inflows and outflows in certain schemes. “As per prevalent industry practice, primarily for liquid and overnight schemes, redemption payouts to investors are processed in the morning hours of T+1 day, whereas the mutual fund schemes receive the maturity proceeds from TREPS and reverse repo in the evening hours of T+1 day,” the regulator said.
“In order to bridge the intraday timing mismatch of inflows and outflows of funds, mutual funds enter into formal intraday borrowing arrangements with financial institutions such as banks,” it added.
SEBI said that under the new rules, mutual funds can use intraday borrowings only for specific purposes. “Intraday borrowings shall be used only for the purpose of repurchase or redemption of units, or payment of interest or Income Distribution cum Capital Withdrawal payouts to unitholders,” the circular said.
The regulator also specified limits on such borrowings to ensure financial discipline. “The amount of intraday borrowings shall not exceed the guaranteed receivables due on the same day from the Government of India, Reserve Bank of India, and Clearing Corporation of India Limited,” SEBI said.
It further clarified that eligible receivables on the day of redemption for intraday borrowings include “maturity proceeds from TREPS, proceeds from reverse repo, maturity proceeds from G-Sec/T-bill/SDL/STRIPS, interest on G-Sec/SDL, and sale proceeds of G-Sec/T-bill/SDL/STRIPS.”
The market regulator also directed asset management companies to adopt formal policies governing the use of such facilities. “The policy for use of the intraday borrowing facility shall be approved by the Board of the AMC and the Board of Trustees and shall be uploaded on the website of the AMC,” SEBI said.
SEBI added that any cost associated with such borrowings must be borne by the asset management company. “The cost of intraday borrowing, if any, shall be borne by the AMC. Further, any loss or cost incurred due to any unforeseen event or delay in receiving the funds shall be borne by the AMC,” the circular said.
Separately, the regulator clarified that borrowing by equity-oriented index funds and exchange-traded funds (ETFs) due to under-execution of sell trades will be allowed only in specific cases. “Borrowings by equity-oriented index funds and equity-oriented ETFs on account of under-execution of sell trades on the Stock Exchange is permissible only for the purpose of participation by such funds in the Closing Auction Session in the equity cash segment of the Stock Exchanges,” SEBI said.
The provision will come into effect in line with the implementation of SEBI’s earlier circular introducing a closing auction session in the equity cash segment of stock exchanges from August 3, 2026. The regulator said the circular has been issued to safeguard investors and ensure the orderly functioning of the market. “This circular is issued to protect the interests of investors in securities, promote the development of, and regulate the securities market,” SEBI said.
