The move formalises an industry practice where fund houses temporarily borrow funds during the day to meet redemption payouts, particularly in liquid and overnight schemes.
In many cases, mutual funds pay investors their redemption proceeds in the morning of T+1, while the schemes receive maturity proceeds from instruments such as TREPS and reverse repo only later in the evening of the same day. Intraday borrowing is used to bridge this timing gap.
Under the framework, which will come into effect from April 1, 2026, such borrowing can be used only for purposes including redemption payments, repurchase of units and distribution payouts to investors.
SEBI said the borrowing amount must not exceed the guaranteed receivables due on the same day from entities such as the Government of India, the Reserve Bank of India and the Clearing Corporation of India Limited.
Eligible receivables include maturity proceeds from TREPS, reverse repo transactions, government securities, treasury bills and state development loans, as well as interest payments and sale proceeds from these instruments.
Asset management companies (AMCs) will also be required to put in place board-approved policies governing the use of intraday borrowing and disclose these policies on their websites.
SEBI clarified that any cost associated with intraday borrowing must be borne by the AMC and cannot be charged to the scheme. The fund house will also bear any loss arising from delays in receiving the expected inflows.
Separately, the regulator also clarified rules for borrowing by equity-oriented index funds and exchange-traded funds (ETFs). Such borrowing will be permitted only to facilitate participation in the closing auction session of stock exchanges, which SEBI has scheduled to begin from August 3, 2026.
The regulator said the circular has been issued under its powers to protect investor interests and ensure smoother functioning of mutual fund operations.