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 keeping settlement of securities on a gross, delivery-based basis.
The consultation paper issued on Thursday is aimed at reducing temporary liquidity requirements and improving settlement efficiency for mutual fund schemes. Under the current framework, mutual fund trades are settled on a gross basis. This means a scheme has to arrange money for its purchases separately, even if it is also due to receive money from sales in the same settlement cycle.
The market regulator has proposed allowing net settlement of funds for outright transactions carried out by mutual fund schemes on recognised stock exchanges. An outright transaction means that a mutual fund either buys or sells a particular security during a settlement cycle, but does not do both.
For example, if a scheme buys securities worth ₹100 crore and has eligible sales worth ₹90 crore, it could settle the net cash requirement of ₹10 crore instead of arranging the full purchase amount separately. The proposal, however, does not allow this for every transaction.
If a mutual fund both buys and sells the same security during the same settlement cycle, those transactions will not qualify for netting. They will continue to be settled on a gross basis.
The proposed change applies only to the cash part of settlement. The securities themselves will continue to be settled on a gross and delivery-based basis. Sebi said this would ensure that the delivery-backed nature of institutional trades is not changed.
The netting will also be allowed only within an individual mutual fund scheme. A mutual fund will not be allowed to use the obligations of one scheme to offset those of another scheme. The AMC, mutual fund and custodian will have to ensure that scheme-wise accounting, daily NAV calculation, asset allocation, investment limits and unit-holder interests are not affected.
If a scheme’s eligible purchase obligations are higher than its eligible sale proceeds, it will have to fund the remaining amount. Any external funding will continue to be governed by the existing rules on borrowing by mutual funds.
Sebi said the proposal could help reduce temporary liquidity pressure, especially during index rebalancing and periods of large subscriptions or redemptions. The move comes after the market regulator allowed FPIs to net their trades in its latest board meeting in June.
The regulator has invited public comments on the proposal until 24 September.
Apoorva is a Mumbai-based journalist at Mint who covers the Securities and Exchange Board of India (SEBI), tracking the pulse of India’s capital markets, regulatory developments and the people who operate within them. She holds a postgraduate diploma in business and financial journalism from the Asian College of Journalism, where she developed a strong foundation in markets, companies, and economic policy. She began her journalism journey with an internship at Bloomberg, where she worked across beats such as real estate, infrastructure, capital markets, and deals, which helped her understanding of business and finance.<br><br>She is guided by the belief that everything in this world can be explained in simple and fewer words, and that idea shapes how she approaches her writing. She aims to cut through complexity and present nuanced regulatory and financial developments in a way that is both accessible and meaningful to readers.<br><br>When she is not tracking market chatter, Apoorva can usually be found deep into a fiction novel or out on a long run. She is also a trained classical dancer in Bharatanatyam, Mohiniyattam, and Kathakali.
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