The Securities and Exchange Board of India (SEBI) has introduced a new framework that gives mutual funds access to intraday borrowing. The new rules take effect from September 1, 2026. The move aims to help mutual funds deal with short cash gaps that arise because money may leave a scheme before other money reaches it.
This is an important change for mutual fund liquidity management. It does not give fund houses a free hand to borrow money. Instead, it creates a controlled facility for cases where a scheme has a clear cash need during the day and expects money to reach its bank account within the same day.
The main idea is simple. A mutual fund may have to pay investors today, while money due to the scheme may arrive later on the same day. The new facility can help bridge that short gap.
Why does SEBI allow intraday borrowing?
Mutual funds deal with large cash flows every day. Investors may ask for redemptions, while schemes may also receive money from securities that mature or from other market transactions.
The timing of these cash flows does not always match. A scheme may have enough money due to it, but that money may not be available at the exact time when a payment has to be made.
This can create a temporary liquidity mismatch.
Earlier rules already allowed mutual funds to borrow for temporary liquidity needs. Such borrowing could be up to 20% of the net assets of a scheme, with a maximum period of six months. The money could be used for needs such as redemption payments, income distribution and certain trade settlements.
SEBI has now created a separate route for intraday needs. The 20% limit does not apply to qualifying intraday borrowing, subject to the conditions set by the regulator.
The facility is wider than the earlier framework
The latest SEBI circular gives mutual funds a wider set of permitted uses than the earlier March framework.
A scheme may use intraday borrowing for all unitholder pay-outs, such as redemptions, IDCW pay-outs and interest. It may also use the facility for the pay-in related to investments made by the scheme.
The rules also cover mark-to-market, or MTM, obligations and foreign exchange settlements. A scheme may use intraday borrowing for the repayment of existing borrowings as well.
This makes the facility more useful for day-to-day treasury needs. It is no longer limited to a narrow set of investor payments.
The 20% borrowing limit remains important
One point needs special attention. The new rule does not remove the normal borrowing limit for mutual funds.
Under the broader borrowing framework, a mutual fund can borrow up to 20% of the net assets of a scheme for temporary liquidity needs. Such borrowing cannot last for more than six months.
The special intraday facility sits outside this 20% limit. That does not mean a scheme can use it as a regular source of finance.
SEBI has placed separate limits on the amount that a fund can borrow through this route. The amount must relate to receivables due to the scheme, with the circular also allowing a specific additional amount for investor pay-outs under the prescribed conditions.
So, the basic purpose remains short-term liquidity support, not long-term leverage.
What counts as receivables?
This is one of the most important parts of the new framework.
The facility can cover guaranteed receivables from sources such as the Reserve Bank of India and clearing corporations. It can also take account of subscription money received in the scheme bank account.
The rules also cover certain amounts that are not guaranteed but are due within the day. These can include maturity proceeds and secondary-market settlement amounts from instruments such as non-convertible debentures, commercial paper, certificates of deposit and OTC swaps.
Under the earlier framework, eligible same-day receivables included maturity proceeds from TREPS, proceeds from reverse repo, maturity proceeds from G-Secs, Treasury Bills, SDLs and STRIPS, interest on G-Secs and SDLs, and sale proceeds from G-Secs, Treasury Bills, SDLs and STRIPS.
The latest framework therefore gives fund managers a broader base of cash flows against which they can manage short intraday gaps.
What changes for liquidity management?
The biggest benefit is better cash-flow control.
A mutual fund does not have to keep a very large amount of cash simply because it expects money to arrive later on the same day. If the expected receipt qualifies under SEBI’s rules, an intraday facility can cover the short period between the payment and the receipt.
This can reduce the need for a large idle cash balance.
For example, suppose a scheme has a large redemption payment due in the morning. The scheme also expects money from a qualifying market transaction later that day. Under the new framework, the fund may use intraday borrowing to meet the earlier payment and repay the facility once the expected cash arrives.
The scheme therefore gets a bridge rather than a permanent source of money.
Liquid and debt funds may see more benefit
The new facility may be especially useful for schemes with large short-term cash flows.
Liquid and overnight funds deal with very short maturity assets and frequent cash movements. A small difference in settlement time can create a temporary cash gap even when the overall liquidity position of the scheme is strong.
For these funds, the new rule can provide more flexibility.
Debt funds may also benefit when large securities mature or when a scheme has a sizeable investor payout on a particular day. The facility can help the fund avoid the need for an unnecessary asset sale simply to cover a timing mismatch.
Equity funds can also use the facility for permitted purposes, including investment pay-ins and certain market obligations, subject to the rules.
The cost will not fall on investors
SEBI has also placed responsibility for the cost of intraday borrowing on the asset management company.
The framework says that the cost of intraday borrowing, if any, will be borne by the AMC. It also places any loss or cost caused by an unforeseen event or a delay in the receipt of money on the AMC.
This is important for investors. The new facility is not meant to pass its financing cost to the scheme or its unit holders.
It also gives AMCs a strong reason to maintain accurate cash-flow forecasts and robust controls.
Strong governance will be required
SEBI has not left the decision entirely to fund managers.
The policy for use of the intraday borrowing facility must receive approval from the Board of the AMC and the Board of Trustees. The policy must also be placed on the AMC’s website.
This means each fund house must have a clear internal framework before it uses the facility.
The AMC will need to define how it checks eligible receivables, how it measures the amount that can be borrowed, how it tracks repayment and how it handles a delay in an expected cash receipt.
What does this mean for investors?
For investors, the change is mainly about smoother liquidity operations.
It does not mean mutual funds will suddenly take more market risk. The facility is meant to cover short cash gaps, not to support speculative positions or long-term portfolio expansion.
A well-run scheme may benefit because it can use its assets more efficiently while still meeting redemption and other payment obligations on time.
The impact on returns is likely to be modest. The larger benefit is operational. A fund manager gets another tool to deal with the timing difference between cash outflows and cash inflows.
A useful change, but not a free funding line
SEBI’s September 1 framework is best seen as a liquidity tool rather than a leverage tool.
The normal 20% of net assets borrowing limit remains in place for the broader borrowing framework. The special intraday route sits outside that limit, but it comes with its own safeguards and limits.
The facility can help a scheme meet payments before expected cash arrives. It can reduce the need for excess cash and avoid unnecessary asset sales. At the same time, the AMC must have board-approved rules and must bear the cost of the facility.
For mutual funds, the change should lead to better cash-flow flexibility. For investors, it should support smoother redemption and settlement operations without turning mutual funds into heavily leveraged vehicles.
In simple terms, SEBI has given mutual funds a short bridge for a short cash gap. The bridge can make liquidity management more efficient, but the rules make sure it cannot become a substitute for sound liquidity planning.
ALSO READ: India ETF Market After SEBI’s New Price Discovery Framework
