The proposal emerged from feedback received on SEBI’s consultation paper dated May 13 regarding the utilisation of intraday borrowing lines by mutual funds.
In its response to comments submitted by market participants, the regulator indicated that it was examining the possibility of allowing mutual funds to benefit from the net settlement framework that was recently introduced for foreign portfolio investors (FPIs).
The development follows SEBI’s board approval on June 19 to broaden the circumstances under which mutual funds can access intraday borrowing facilities.
The regulator allowed such borrowings not only against receivables due during the day, but also for meeting unitholder redemption payouts, bridging timing mismatches in pay-in and payout settlements within asset classes, and other operational requirements.
SEBI had earlier, through a circular issued on Apr. 24, permitted FPIs to settle cash market purchase and sale obligations with custodians on a net basis rather than the earlier gross settlement requirement.
The relaxation came after FPIs and custodians highlighted that gross fund settlements created liquidity pressures, increased funding costs due to foreign exchange slippages, and resulted in operational inefficiencies, particularly during index rebalancing periods.
According to the Informist report, one or more mutual funds suggested that a similar net settlement framework be extended to domestic fund houses. They argued that the move would improve cash management efficiency and reduce the need for intraday borrowings.
SEBI said the suggestion was under consideration.
The regulator also addressed feedback from other stakeholders on the intraday borrowing proposal. A bank and a custodian cautioned against permitting intraday borrowing against non-guaranteed receivables, saying such a framework could expose the banking system to significant liquidity and credit risks.
SEBI, however, did not accept the contention. The regulator said allowing borrowing against non-guaranteed receivables would help address settlement timing mismatches and “protect investor returns”.
Separately, another custodian argued that mutual funds, being collective investment vehicles, should deploy only funds that have already been received from investors.
“As such, any purchase of securities or investments should be on clear funds available rather than on anticipated fund receipts,” the custodian said, adding that intraday borrowing beyond receivables was “pure leverage”.
Despite the concerns raised, SEBI proceeded with its decision to expand the permitted use cases for intraday borrowing by mutual funds, while continuing to evaluate the proposal for extending net fund settlement benefits to the industry.
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