The Securities and Exchange Board of India (Sebi) has proposed allowing mutual fund schemes to settle cash obligations from stock-market transactions on a net basis, while retaining gross, delivery-based settlement for securities. The move aims to reduce temporary liquidity requirements for mutual fund schemes and improve settlement efficiency.
Under the current framework, mutual fund trades are settled on a gross basis, requiring schemes to arrange funds for purchases separately even when they are also due to receive proceeds from sales during the same settlement cycle. Sebi’s proposed framework would allow eligible purchase and sale obligations to be offset for the cash component of settlement.
The proposal covers outright transactions carried out by mutual fund schemes on recognised stock exchanges. An outright transaction refers to a situation where a scheme either buys or sells a particular security during a settlement cycle, rather than both buying and selling the same security.
For instance, if a scheme has eligible purchases worth Rs 100 crore and eligible sales worth Rs 90 crore, it would be able to settle the net cash requirement of Rs 10 crore instead of arranging the full purchase amount separately. However, the proposed facility would not apply where a scheme buys and sells the same security during the same settlement cycle.
Securities Settlement To Stay Gross
The proposed netting would apply only to the cash component of settlement, while the securities themselves would continue to be settled on a gross and delivery-based basis. Sebi said this would ensure that the delivery-backed nature of institutional trades remains unchanged.
Net settlement would also be permitted only within an individual mutual fund scheme. Obligations of one scheme would not be allowed to offset those of another scheme, with the asset management company, mutual fund and custodian required to ensure that scheme-wise accounting, daily net asset value calculation, asset allocation, investment limits and unit-holder interests are not affected.
Where a scheme’s eligible purchase obligations exceed its eligible sale proceeds, it would have to fund the remaining amount. Any external funding would continue to be governed by existing rules applicable to borrowing by mutual funds. Sebi said the proposed framework could help reduce temporary liquidity pressures, particularly during index rebalancing and periods of large subscriptions or redemptions.
The proposal follows the regulator’s decision earlier this year to allow foreign portfolio investors to net their trades. The regulator has invited public comments on the proposal until 24 September.