The Securities and Exchange Board of India has proposed allowing mutual fund schemes to settle funds on a net basis for certain cash-market transactions, while continuing to settle securities on a gross basis.
SEBI issued a consultation paper on September 3, 2026, and has invited public comments on the proposal until September 24, 2026.
The regulator said the proposal aims to make settlement easier and more efficient and reduce temporary liquidity requirements for mutual fund schemes. It said existing safeguards related to delivery-based settlement, scheme-wise accounting, valuation and investor protection would remain unchanged.
What is the current system?
Under the existing framework, institutional investors are not allowed to square off trades on an intra-day basis. Their cash-market transactions are settled on a gross basis through custodians, and institutional trades must be backed by delivery.
Each mutual fund scheme must also maintain separate assets and liabilities, scheme-wise books and records and daily net asset value (NAV) calculations.
At present, a mutual fund scheme has to arrange funds for purchases separately from sale proceeds that it may receive in the same settlement cycle. This can create temporary funding requirements even when the scheme has both buying and selling transactions.
SEBI said this can create liquidity pressure and operational difficulties, particularly during periods such as index rebalancing, when passive funds may need to make large portfolio changes.
SEBI has proposed net settlement of funds for outright purchase and sale transactions carried out by a mutual fund scheme in the cash market on a recognised stock exchange.
An outright transaction would mean either a purchase or a sale of a security during a settlement cycle, but not both.
Transactions involving only purchases or only sales in a particular security can be considered for netting. However, if a scheme both buys and sells the same security during the same settlement cycle, those transactions will not be eligible for netting.
Settlement of securities will continue on a gross basis. STT and stamp duty will also continue to be levied on a delivery basis.
Netting will be allowed only scheme-wise
The proposed net settlement will apply only at the level of an individual mutual fund scheme.
A mutual fund will not be allowed to net transactions across different schemes. Asset management companies and custodians will have to ensure that the system does not affect scheme-wise accounting, valuation, daily NAV calculation or the segregation of securities and funds.
What happens to the remaining obligation?
If the value of outright sales is lower than the value of outright purchases, the scheme will have to fund the remaining amount along with obligations arising from transactions that are not eligible for netting.
If outright sales are higher than outright purchases, the excess sale amount cannot be adjusted against purchase obligations from non-outright transactions.
Any external funding used to meet the remaining payment obligation will continue to be subject to rules governing borrowing by mutual funds.
SEBI has proposed that the Association of Mutual Funds in India, in consultation with custodians, clearing corporations, stock exchanges and other stakeholders, may formulate operational standards.
These standards could cover partially confirmed or rejected trades, reporting and file formats, reconciliation, exception handling, audit trails and scheme-level controls.
SEBI said the proposal would not allow trade or delivery netting, dilute the delivery-backed nature of institutional trades or permit adjustments between different mutual fund schemes.
SEBI has provided an example to explain how the proposed system would work.
Suppose a mutual fund scheme makes the following transactions:
- Security A: Buys securities worth Rs 1,000 and makes no sale. This is an outright purchase.
- Security B: Buys securities worth Rs 1,000 and sells securities worth Rs 2,000. This is a non-outright transaction because both a purchase and sale take place in the same settlement cycle.
- Security C: Makes no purchase but sells securities worth Rs 2,000. This is an outright sale.
Under the current system, the scheme’s fund pay-in would be Rs 2,000 and fund pay-out would be Rs 4,000.
Under the proposed system, the outright purchase in Security A and outright sale in Security C can be netted. Security B would continue to be settled on a gross basis.
As a result, the fund pay-in would be Rs 1,000, while the fund pay-out would be Rs 3,000.
What changes and what stays the same?
The proposed system would reduce the temporary funding requirement for a mutual fund scheme by allowing eligible outright purchase and sale transactions to be netted for fund settlement.
However, transactions involving both a purchase and sale of the same security in the same settlement cycle would continue to be settled on a gross basis.
The settlement of securities itself would also continue on a gross basis.
Impact on mutual fund investors
For retail investors, the impact should be mostly indirect. SEBI’s September 3 consultation paper is about how mutual fund schemes settle their cash-market transactions, not about changing the way individual investors buy or sell shares.
SEBI invites public comments
SEBI has sought public views on four key issues:
Whether mutual fund schemes should be allowed to use net settlement of funds for outright cash-market transactions while securities continue to be settled on a gross basis.
Whether transactions involving both purchase and sale of the same security in the same settlement cycle should remain outside the netting framework.
Whether the proposal should initially be limited to mutual fund schemes’ cash-market transactions.
Any other suggestions, along with supporting reasons.
Public comments can be submitted through SEBI’s online public comments form until September 24, 2026.
