How will SEBI’s new rules change mutual fund cash management?

The Securities and Exchange Board of India (SEBI) has proposed a broader role for intraday borrowing facilities for mutual funds while simultaneously evaluating a specialised category of distributors aimed at deepening retail participation in debt products. The twin proposals signal the regulator’s focus on strengthening operational efficiency and widening participation across India’s investment ecosystem.

Under the proposal, mutual funds may be allowed to use intraday borrowing lines beyond their current limited use for redemption payouts. SEBI is considering permitting these facilities for purposes such as trade settlements, forex obligations, derivative margin payments and repayment of existing borrowings, helping fund houses address operational timing gaps more efficiently.

Industry participants believe the move could significantly improve liquidity management for asset management companies (AMCs), particularly in situations where transaction timelines across asset classes do not align.

Timing mismatches

Praveen Shankaran, Chief Operating Officer at KFin Technologies, said the proposal primarily addresses timing mismatches rather than operational inefficiencies.

For example, a hybrid fund reallocating capital from debt to equities may sell bonds and buy stocks simultaneously. However, bond settlements and equity settlements often follow different timelines, potentially creating temporary funding gaps.

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“Managing timing mismatches between settlements becomes important, particularly when investing across different asset classes with different settlement cut-offs,” Shankaran noted.

Another challenge arises in overseas investments, where timezone differences and currency settlement processes can create intraday liquidity requirements. For instance, converting Indian rupees into US dollars for international investments may require funds to be available before foreign market cut-off times.

Lower cash buffers

Experts say the proposal could reduce the need for AMCs to maintain large cash buffers solely for settlement-related contingencies.

According to Shankaran, allowing intraday borrowing may enable fund houses to keep more investor money invested in markets rather than parked in low-yield cash reserves.

This may lead to modest improvements in portfolio yield optimisation.

“It will help improve returns since cash surplus required to be maintained is lower,” he said.

The proposal may also help derivative margin management. Instead of holding surplus cash to meet margin requirements, AMCs could rely on short-term liquidity lines and keep a larger share of assets invested.

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However, experts caution that the facility does not solve broader redemption or liquidity risks.

Shankaran noted that failed settlements or counterparty disruptions could create stress because intraday borrowing facilities would still need to be repaid on the same day. He added that while investor returns may improve, systemic risk could rise marginally.

Retail debt participation

Separately, SEBI is exploring a specialised category of distributors aimed at improving retail participation in debt investments.

The proposal comes as fixed-income products often require a deeper understanding of factors such as default risk, liquidity risk and price movements.

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Shankaran said specialised distributors could help bridge knowledge gaps and improve investor awareness, particularly for complex debt products. The initiative may also support simplified onboarding, making debt investing easier and less time-consuming for retail participants.

Together, both proposals reflect SEBI’s broader attempt to modernise market infrastructure while making India’s financial ecosystem more efficient and accessible.