SEBI Proposes Scheme-Level Net Fund Settlement for Mutual Funds; Comments Open Until September 24

The Securities and Exchange Board of India has proposed allowing mutual fund schemes to settle eligible cash-market fund obligations on a net basis at the individual scheme level, while continuing to settle securities on a gross delivery basis. SEBI published the consultation paper on 3 September 2026 and has invited public comments on the proposal.

The proposal targets a practical liquidity problem in the current settlement process. Mutual fund schemes may have sale proceeds receivable and purchase obligations payable within the same settlement cycle, yet under gross fund settlement they can still need to arrange temporary cash for the full purchase obligation. SEBI’s proposal would allow eligible outright purchase and sale obligations to be netted within the same scheme, reducing temporary funding pressure without introducing cross-scheme netting or changing delivery-based securities settlement.

What SEBI is proposing

The consultation covers outright purchase or sale transactions undertaken by mutual fund schemes in the cash market on recognised stock exchanges. Under the proposed framework, fund obligations for eligible outright transactions could be netted within a settlement cycle at the level of a single mutual fund scheme.

An outright transaction, for this purpose, is a purchase or a sale in a security during the settlement cycle, but not both in the same security. If a scheme both buys and sells the same security in that settlement cycle, the transactions in that security would remain outside the proposed netting mechanism and continue to be settled on a gross basis.

SEBI is not proposing to net the securities themselves. Securities would continue to move on a gross delivery basis. The proposal is therefore about the cash leg of eligible transactions rather than an intraday trading or delivery-netting relaxation.

No netting across mutual fund schemes

A key control is the scheme-level boundary. Obligations of one scheme could not be offset against obligations of another scheme managed by the same asset management company. This preserves scheme-wise asset segregation and accounting, an important protection because each mutual fund scheme has a separate portfolio, NAV and investor base.

Secondary reporting on the consultation paper also states that securities transaction tax and stamp duty would continue to apply on the delivery basis. Daily valuation, investor-protection safeguards and the existing delivery-backed structure are intended to remain unaffected by the proposed cash-settlement change.

Why SEBI is considering the change

Under the current institutional framework, cash-market transactions are settled on a gross basis through the custodian process. Even when a scheme has substantial sale proceeds due in the same cycle, it may need to arrange funds temporarily to meet purchase obligations. This can be especially relevant during index rebalancing by passive funds or during periods of large investor subscriptions and redemptions.

SEBI’s stated policy objective is to improve settlement efficiency, ease operational pressure and reduce temporary liquidity requirements. The regulator had earlier allowed a net-fund-settlement framework for eligible outright transactions by foreign portfolio investors, and the mutual-fund proposal adapts that concept to domestic schemes with scheme-specific safeguards.

How the cash obligation would work

If eligible outright purchase obligations exceed eligible outright sale proceeds within a scheme, only the residual net amount would need to be funded through the proposed mechanism. Conversely, excess sale proceeds would not become a general pool that could be used to offset unrelated or ineligible obligations. Any external borrowing or funding used for the remaining settlement obligation would continue to have to comply with the mutual-fund regulatory framework.

This distinction is important for finance and operations teams because the consultation is not proposing unrestricted cash pooling. The benefit is narrower: lower temporary gross funding for a defined set of trades within the same scheme and settlement cycle.

Implementation standards would still be needed

SEBI has proposed that industry implementation standards be developed with the Association of Mutual Funds in India in consultation with custodians, clearing corporations, stock exchanges and other relevant stakeholders. Operational design will matter because systems must correctly identify eligible outright trades, exclude same-security buy-and-sell activity, preserve scheme-level segregation and reconcile the resulting net cash obligation with gross securities settlement.

Comments open until September 24

SEBI’s official page provides a public-comment route for the consultation. Reputable market reporting on the paper states that comments are invited until 24 September 2026. The proposal is therefore not yet a final rule or circular. Asset management companies, custodians, fund accountants, brokers and clearing infrastructure participants should treat the paper as a live consultation and track the final framework before changing settlement controls.

What finance, audit and compliance teams should examine

- Whether current treasury processes measure gross versus net settlement funding by scheme.

- How custodian and fund-accounting systems would tag eligible outright transactions and exclude ineligible same-security buy-and-sell activity.

- Whether reconciliation controls can maintain gross securities settlement while calculating a separate net fund obligation.

- How any residual funding requirement would remain within the applicable borrowing and liquidity rules.

- What changes to operating procedures, broker instructions and control testing would be required if SEBI finalises the proposal.

The consultation could reduce short-lived funding requirements without weakening the scheme-wise segregation that sits at the centre of mutual fund operations. The practical point for professionals is to distinguish the proposed cash-netting relief from broader trade netting: securities remain gross, netting stays within each scheme, and the final requirements will depend on SEBI’s post-consultation decision.

Official source: View the official source document

Key takeaway

SEBI has proposed netting eligible cash-market fund obligations within each mutual fund scheme while keeping securities settlement gross; public comments are being sought on the September 3 consultation.