The Securities and Exchange Board of India (SEBI) has changed the rules for intraday borrowing by mutual funds. The new framework aims to help funds deal with short-term cash gaps caused by different settlement times in the market.
SEBI issued its latest circular on July 10, 2026. The new rules will take effect from September 1, 2026. The move gives mutual funds more flexibility when they need cash for a few hours but also puts clear limits on how such borrowing can take place.
The change is important because a mutual fund can have enough money due to it but still face a cash shortage at a particular time of the day. In such a case, the problem is not a lack of assets. It is simply a gap between when money has to go out and when money comes in.
What Is Intraday Borrowing?
Intraday borrowing is a short-term loan that a mutual fund can use within the same day. The fund takes the money when it faces a temporary cash need and pays it back before the end of the day.
This can be easier to understand with a simple example. Suppose a fund has to pay investors ₹100 crore in the morning after redemption requests. At the same time, the fund expects ₹100 crore from securities or other receivables later that day.
The fund may have enough money in total, but it does not have the cash at the exact time when the payment is due. An intraday loan can bridge that gap.
Once the expected money reaches the fund, the loan can be repaid. The purpose is not to give the fund extra money for investments. It is meant to solve a short-term cash timing problem.
SEBI’s March 2026 circular had already recognised this issue. It noted that liquid and overnight schemes often process redemption payments in the morning on T+1, while maturity proceeds from TREPS and reverse repo can reach the scheme later in the day.
The Earlier Borrowing Rule
Mutual funds have long faced limits on how much they can borrow.
Under the 2026 framework, normal borrowing can be used for certain temporary liquidity needs. Such borrowing cannot exceed 20% of the net assets of a scheme, and its duration cannot exceed six months. The rules cover needs such as repurchase or redemption of units, payment of interest or Income Distribution Cum Capital Withdrawal, and certain trade settlement needs.
There was an important difference for intraday borrowing. The 20% limit does not apply to intraday borrowing, subject to conditions set by SEBI.
This gave SEBI room to create a separate framework for very short-term cash gaps. The idea was to allow funds to deal with payment timing without treating a few hours of borrowing in the same way as a loan that stays for weeks or months.
Why the Earlier Framework Was Not Enough
The March 2026 rules focused mainly on redemption and payout needs. Soon after, fund houses raised operational concerns.
SEBI then issued a consultation paper on May 13, 2026, to seek views on the use of intraday borrowing lines by mutual funds.
The issue was simple. Mutual funds face many types of cash movements during a trading day. A fund may need cash for a security purchase, a margin requirement or a foreign exchange settlement. These needs can arise even when the fund expects money later on the same day.
A narrow rule could force a fund to sell assets or keep more cash than it otherwise would. That can make portfolio management less efficient.
SEBI therefore moved towards a wider framework. The regulator’s aim was to allow a fund to deal with genuine short-term liquidity gaps while making sure the facility does not become a way to take extra market risk.
Four Main Uses Are Now Allowed
Under the July 10 circular, mutual funds can use intraday borrowing for four broad purposes.
The first is unitholder payouts. This covers redemptions, IDCW payouts, interest and other similar payments to investors.
The second is pay-in for investments made by the scheme. A fund may have to make a payment for a security purchase before another cash inflow reaches its account.
The third covers mark-to-market obligations and foreign exchange settlements. These can create a cash need during the day even when the fund has enough money expected later.
The fourth is repayment of existing borrowings.
This is a wider framework than the earlier approach. It reflects the fact that cash needs can arise from several parts of the fund’s daily operations.
How Much Can a Fund Borrow?
SEBI has not given funds a free hand to borrow any amount they want.
The amount of intraday borrowing is tied to receivables. These can include guaranteed receivables such as inflows from the Reserve Bank of India, clearing corporations and subscription money received in the scheme’s bank account.
Funds can also use certain non-guaranteed receivables that are visible during the day and are due to reach the scheme by the end of the day. These can include maturity proceeds and secondary-market settlement amounts from NCDs, commercial papers, certificates of deposit and OTC swaps.
There is also an additional provision. An AMC can use intraday borrowing beyond these receivables when it is solely for redemption and other unitholder payouts allowed under Regulation 42(1) of the SEBI (Mutual Funds) Regulations, 2026.
This structure is important because it connects borrowing to an actual cash need rather than allowing a fund to borrow simply because credit is available.
The Money Must Be Repaid the Same Day
One of the strongest safeguards is the repayment rule.
AMCs must ensure that intraday borrowings are repaid by the end of the day. If any such borrowing turns into an overnight loan, that borrowing must stay within the normal regulatory limits and must have a purpose allowed under Regulation 42(1).
This prevents intraday borrowing from quietly turning into regular borrowing.
The distinction matters. A loan that lasts for a few hours because of a settlement gap is very different from a loan that stays for several days to support a fund’s investment position.
AMC and Trustee Boards Will Have More Responsibility
SEBI has also placed responsibility on the boards of AMCs and trustees.
They must approve a policy for the use of the intraday borrowing facility. The policy must be available on the AMC’s website and must cover areas such as approval processes and monitoring systems.
AMCs must also keep scheme-level records. These records must show the reason for the liquidity gap and the expected source of repayment.
This creates a clear audit trail. If a fund uses the facility, there should be a record of why it needed the money and how it expected to repay the amount.
The AMC, Not Investors, Bears the Extra Cost
Another important safeguard relates to cost.
The cost of intraday borrowing must be borne by the AMC. If an unexpected event or a delay in the expected receivable creates a loss or extra cost, the AMC must also bear that cost.
This reduces the risk that investors could end up paying for a liquidity decision made by the fund house.
Why This Matters for Mutual Fund Investors
For investors, the new framework should mainly improve the way funds handle short-term cash pressure.
A fund does not always need to sell a security just because cash is needed for a few hours. If the fund has a reliable cash inflow later that day, intraday borrowing can provide a bridge.
This can be especially useful for liquid and overnight schemes, where cash flows can be large and settlement times matter.
At the same time, the new rule does not mean mutual funds can freely use debt to increase investment exposure. The framework is built around temporary liquidity needs, defined purposes, repayment by the end of the day and board-level controls.
A Shift Towards More Flexible Liquidity Management
The change shows how India’s mutual fund rules are adapting to a more complex market structure.
Modern mutual funds deal with several types of transactions across different settlement systems. Cash may come into a scheme at one time and have to leave at another. A rigid borrowing rule may not always fit this reality.
SEBI’s new approach tries to solve that problem without removing safeguards.
The journey also shows how the regulator adjusted its approach after industry feedback. SEBI first issued its borrowing circular on March 13, 2026. It later postponed the relevant intraday borrowing provisions to July 15, 2026 through an addendum dated March 25, 2026, after asset management companies raised operational concerns.
The regulator then issued the wider framework on July 10, 2026, with an effective date of September 1, 2026.
What the New Rule Really Means
The biggest change is not that mutual funds can now borrow more money for investment. They cannot use this facility as a simple tool for leverage.
The real change is that SEBI has recognised the importance of cash timing.
A mutual fund can be financially sound and still face a temporary cash shortage. The new framework gives it a controlled way to handle that gap.
For investors, the key takeaway is simple: SEBI is giving mutual funds a wider liquidity tool, but it has placed clear walls around its use. The borrowing must serve a genuine short-term need, the amount must relate to eligible receivables or permitted payouts, the loan must be repaid by the end of the day, and the AMC must carry the cost of the facility.
That balance between flexibility and control is at the heart of SEBI’s new liquidity framework.
