Markets watchdog Sebi on Friday issued new guidelines for mutual funds to undertake intra-day borrowing arrangements with financial institutions such as banks to manage temporary liquidity mismatches. The new rules effective April 1, 2026.
However, the Sebi capped the borrowing to same-day receivables. The new rules, issued through a circular on Friday also mandates the board of an asset management company, as well as the board of trustees, will be required to approve a policy governing the use of intra-day borrowing facilities. A major benefit is that the intra-day borrowing is over and above the present 20% of the next asset value borrowing allowed now.
Further, the AMCs will have to disclose the approved policy on its website, Sebi said in its circular.
The rules also restrict usage purposes, mandate board-approved policies, and ensure asset management companies bear related costs and risks, according to the circular.
The objective is to help intra-day liquidity issues at the same time putting in place safeguards to ensure investor protection.
Sebi said mutual funds often face intraday timing mismatches between redemption pay-outs and inflows from investments. Typically, redemption payments to investors are processed during the morning hours of the settlement day (T+1), while funds from instruments such as TREPS and reverse repo transactions are received later in the evening.
To bridge this temporary funding gap, MFs sometimes rely on short-term borrowings from banks/other financial institutions. The regulator said the new rules formally recognise this practice while placing clear limits and operational conditions.
Mutual funds are generally allowed to borrow up to 20% of the net assets of a scheme for a maximum period of six months to meet redemption requests, paying income distribution or settling certain trades. However, this 20% cap will not apply to intraday borrowings, provided they meet specific conditions laid out by the regulator.
Sebi has also clarified that intraday borrowing can be used only to facilitate repurchase or redemption of units, interest payments or income distribution pay-outs to unitholders.
The regulator has also capped the quantum of intraday borrowing. The amount borrowed cannot exceed receivables guaranteed on the same day from institutions such as the government of India, the Reserve Bank, and the Clearing Corporation.
Eligible receivables include maturity proceeds from TREPS, reverse repo transactions, government securities, treasury bills, state development loans, STRIPS, as well as interest payments and sale proceeds from these instruments.
To strengthen oversight, Sebi has mandated that each AMC’s board and trustees must approve a formal policy governing the use of intraday borrowing facilities, which must also be disclosed on the AMC's website.