SEBI Considers Net Settlement for Mutual Funds to Ease Cash-Management Pressures

The Securities and Exchange Board of India is examining a proposal that could change how mutual fund schemes manage settlement-related liquidity in the equity market. SEBI Chairman Tuhin Kanta Pandey said at the Association of Mutual Funds in India annual general meeting on 21 August 2026 that the regulator is considering allowing mutual fund schemes to settle their equity-market fund obligations on a net basis.

The proposal matters because mutual funds can face simultaneous purchase and sale obligations across schemes and market transactions. Under a net-settlement approach, offsetting fund obligations can be aggregated so that the amount that ultimately needs to move is based on the net payable or receivable position rather than on separate gross movements. Industry participants have argued that this can reduce temporary cash requirements and lessen dependence on intraday funding.

Why mutual funds are seeking net settlement

Asset management companies manage large volumes of daily purchases, redemptions and portfolio trades. When settlement obligations are handled gross, an AMC may need to arrange liquidity even when sale proceeds and purchase obligations substantially offset each other. A net framework could therefore improve treasury efficiency and reduce the amount of cash that must be mobilised during the settlement cycle.

According to current reporting on the Chairman's address, AMCs have sought treatment similar to the framework already made available to foreign portfolio investors. SEBI had earlier permitted FPIs to settle certain equity cash-market fund obligations with custodians on a net basis. That step followed industry representations that gross settlement could create avoidable liquidity pressure, funding costs and operational inefficiencies.

What SEBI is reviewing beyond settlement

The August 21 address also pointed to a broader regulatory review of the mutual fund ecosystem. SEBI is examining the scope of activities that asset management companies are permitted to undertake. The regulator is also reviewing the framework governing mutual fund distributors, including areas where distribution and investment-advisory regulation may overlap.

These reviews come as India's mutual fund industry has expanded sharply in scale and retail reach. In his address, the SEBI Chairman emphasised that the industry's next phase of growth should be judged not only by assets and participation but also by investor outcomes, governance and the quality of market intermediation.

What the proposal could mean for AMCs

If SEBI converts the proposal into a formal framework, finance and operations teams at AMCs would need to assess how net settlement affects treasury processes, custodian interfaces, settlement controls, cash forecasting and internal risk limits. The operational benefit could be meaningful, but implementation details will matter, including which transactions qualify, how obligations are netted, the role of custodians and what controls are required to preserve scheme-level segregation and investor protection.

For auditors, compliance teams and finance professionals working with asset managers, the eventual framework could also affect control documentation around settlement, liquidity management and reconciliation. Any accounting or operational changes should be based on the final SEBI circular or regulatory instructions rather than on the proposal alone.

Status: proposal under examination, not a final rule

The key point for market participants is that SEBI has signalled consideration of net settlement for mutual funds; it has not yet been identified in this development as a final operative rule for mutual fund schemes. AMCs should therefore treat the announcement as a policy signal and wait for a formal circular, consultation or implementation framework before changing settlement processes.

For now, the proposal indicates that SEBI is actively looking at market-structure changes that could reduce avoidable liquidity friction while maintaining regulatory safeguards. A formal follow-up from the regulator would be the trigger for detailed implementation planning.

Useful official links

Address by Chairman at AMFI Annual General Meeting

Key takeaway

The proposal was disclosed in the SEBI Chairman's August 21, 2026 address to the mutual fund industry and could materially affect AMC settlement and liquidity operations.