Sebi permits mutual funds to net cash market fund obligations from April

Capital markets regulator Sebi on Thursday allowed mutual fund schemes to net their fund obligations arising from outright purchase and sale transactions in the cash market, a move aimed at reducing temporary funding requirements and improving settlement efficiency.

The move extends to mutual funds a net settlement facility that Sebi had earlier introduced for foreign portfolio investors (FPIs) this year.

Under the new framework, mutual funds can offset funds payable against funds receivable within the same scheme and settlement cycle. However, the facility will not be available across different schemes of the same mutual fund.

Further, if a scheme buys and sells the same security during the same settlement cycle, those transactions will not qualify for net settlement and will continue to be settled on a gross basis.

"With a view to enhance operational efficiency, reduce temporary funding requirements and improving settlement efficiency for mutual fund schemes, it has been decided to permit net settlement of funds, at the level of an individual mutual fund scheme, for outright transactions undertaken in the cash segment of stock exchanges, subject to the conditions specified in this circular," Sebi said.

Outright transactions mean either a purchase or a sale of a security, but not both, in the same settlement cycle undertaken by a mutual fund scheme.

Sebi clarified that the settlement of securities will continue on a gross basis, while the proposed netting facility will apply only to fund obligations.

The regulator said non-outright transactions, including derivatives, securities lending and borrowing, short selling-related transactions and other transactions not specifically covered, will remain outside the framework. The Securities and Exchange Board of India (Sebi) has asked the Association of Mutual Funds in India (AMFI) to formulate implementation standards in consultation with clearing corporations, stock exchanges, custodians and other stakeholders.

AMCs and custodians will also have to put in place adequate systems and controls to ensure scheme-wise accounting, maintain audit trails and prevent any cross-scheme adjustment of obligations. The new framework will come into effect from April 1, 2027