Securities and exchange board of India (Sebi) proposed in a consultation paper on Thursday to allow mutual funds to settle their transactions in the cash market on a net basis. The proposal is intended to facilitate ease of doing business, improve settlement efficiency and reduce temporary liquidity requirements for mutual fund schemes, while ensuring that existing safeguards relating to delivery-based settlement, scheme-wise accounting, valuation and investor protection remain unaffected. The regulator had earlier allowed net settlement for outright purchase or sale transactions undertaken by FPIs in April.
Operational Rules
The proposed regulations will allow mutual funds to settle their obligations on a net basis for outright purchase or sale transactions, but not for transactions involving both at the same time. The fund houses can net obligations for such outright transactions at the scheme level during a settlement cycle, but no netting will be allowed across schemes.
Currently, mutual funds settle their transactions in the cash market on a gross basis where they have to arrange funds for large purchase transactions on a temporary basis even if there is an offsetting sale transaction for the same scheme in the same settlement cycle, creating liquidity issues, operational inefficiencies and reliance on short-term funding for fund houses, especially during index rebalancing for passive funds and during events of large investor subscriptions or redemptions.
Implementation Framework
The regulator clarified that the fund house will only need to settle transactions under the proposed mechanism where the value of purchase transactions exceed the value of sale transactions. The regulator has also asked the association of mutual funds in India (Amfi) to formulate the implementation standards in consultation with other stakeholders like custodians, clearing corporations and stock exchanges.
The regulator has asked relevant stakeholders to share their views on the proposal by September 24.