The market regulator noted that mutual funds frequently encounter timing gaps between redemption payouts and the receipt of investment proceeds on settlement days. Typically, redemption payments to investors are processed in the morning of the T+1 settlement cycle, whereas funds from instruments such as TREPS and reverse repo transactions usually arrive later in the evening.
Because of this timing difference, mutual fund schemes sometimes resort to short-term borrowing from banks or financial institutions to manage temporary funding gaps. SEBI said the updated guidelines formally recognise this operational requirement but introduce defined limits and conditions for such borrowing.
Under existing norms, mutual funds can borrow up to twenty per cent of a scheme’s net assets for a maximum period of 6 months for purposes such as meeting redemption requests, distributing income or settling certain transactions. However, SEBI clarified that this twenty per cent borrowing cap will not apply to intraday borrowings, provided they comply with the regulator’s specified conditions.
The regulator stated that intraday borrowing will be permitted only for specific purposes, including facilitating repurchase or redemption of units, making interest payments, or distributing income to unitholders.
These receivables may include maturity proceeds from TREPS, reverse repo transactions, government securities, treasury bills, state development loans and STRIPS, along with interest payments and sale proceeds arising from these instruments.
To strengthen governance and transparency, SEBI has directed that the board and trustees of every asset management company approve a formal policy governing the use of intraday borrowing facilities. This policy must also be disclosed on the AMC’s official website.
Importantly, the regulator clarified that any costs associated with intraday borrowing must be borne by the asset management company itself and not by the mutual fund scheme or its investors. In addition, if there are delays or unexpected issues in receiving the anticipated funds, the resulting losses will also have to be absorbed by the AMC.
SEBI has also addressed borrowing norms for equity-oriented index funds and exchange-traded funds. These funds will be allowed to borrow money if sell trades are not executed in time, but only to facilitate participation in the closing auction session of stock exchanges. This provision will come into effect from August 3.
