SEBI Widens Intraday Borrowing Facility for Mutual Funds from September 1

Broader liquidity tool for mutual funds

The Securities and Exchange Board of India has widened the circumstances in which mutual funds may use intraday borrowing to manage temporary liquidity mismatches arising from differences in market settlement timings. The facility may be used for specified unitholder payouts, investment pay-ins, mark-to-market obligations, foreign exchange settlements and repayment of existing borrowings.

The new framework will take effect from September 1, 2026. It is particularly relevant for asset management companies, trustees, fund accounting teams, treasury functions and compliance professionals responsible for ensuring that scheme-level cash requirements are met without turning a temporary timing mismatch into impermissible leverage.

SEBI set out the conditions in Circular No. HO/(92)2026-IMD-POD-2/I/16006/2026 dated July 10, 2026. The circular is addressed to all mutual funds, AMCs, trustee companies, boards of trustees and the Association of Mutual Funds in India.

Why the framework was revised

Intraday liquidity mismatches may arise even when a scheme is due to receive money on the same day. Settlement proceeds, maturity payments, subscriptions and other receivables may reach the scheme after it must fund a redemption, security purchase, margin obligation or foreign exchange settlement.

SEBI’s framework allows a mutual fund to bridge that timing gap during the day. The facility is therefore directed at settlement and cash-flow management rather than the creation of a continuing source of borrowed capital.

The circular follows an amendment to the SEBI (Mutual Funds) Regulations, 2026 through Gazette Notification No. CG-MH-E-07072026-274229 dated July 3, 2026. SEBI said the regulatory amendment permitted intraday borrowing by mutual funds for purposes to be specified through the circular.

The July 10 circular supersedes the guidelines contained in clause 5.9.1 of SEBI’s Master Circular for Mutual Funds dated March 20, 2026, as well as SEBI Circular No. HO/(92)2026-IMD-POD-2/I/7885/2026 dated March 25, 2026. Accordingly, AMCs will need to align their policies and operating procedures with the July framework before it becomes effective.

Permitted uses of intraday borrowing

Under clause 2.1, mutual funds may use the facility for four broad categories of payment.

First, borrowing may support unitholder payouts, including redemptions, Income Distribution cum Capital Withdrawal payouts and interest. This enables a scheme to meet an amount due to investors while awaiting same-day cash inflows.

Second, it may be used for pay-in obligations relating to investments made by a scheme. This addresses situations where the scheme must settle a purchase before an expected receipt becomes available in its bank account.

Third, the facility extends to mark-to-market obligations and foreign exchange settlements. This is operationally important for schemes whose payment obligations may crystallise at a particular point during the day while other settlement proceeds remain in transit.

Fourth, intraday borrowing may be used to repay existing borrowings. This does not remove the requirement to close the intraday exposure by the end of the day or permit an AMC to disregard the rules governing any borrowing that becomes overnight.

How the borrowing amount is determined

The circular connects the permissible quantum primarily to identified receivables. Intraday borrowing may be availed against guaranteed receivables, including inflows from the Reserve Bank of India and clearing corporations, as well as subscription money already received in scheme bank accounts.

It may also be supported by non-guaranteed receivables that are sighted during the day and expected to reach the scheme by the end of that day. SEBI’s examples include maturity proceeds or secondary-market settlement receipts from non-convertible debentures, commercial paper, certificates of deposit and over-the-counter swaps.

The distinction is significant for internal controls. Before using a borrowing line, an AMC should be able to identify the receivable, establish that it is visible and expected on the same day, and connect it to the proposed repayment. A general expectation that liquidity will become available would not provide the same documentary basis as a specifically sighted receivable.

The circular also permits additional intraday borrowing beyond these two receivable-linked categories, but solely for meeting redemptions and other payouts to unitholders specified under Regulation 42(1) of the SEBI (Mutual Funds) Regulations, 2026. This additional flexibility is therefore purpose-restricted and should not be treated as an unrestricted expansion of a scheme’s borrowing capacity.

End-of-day repayment remains central

Responsibility for repayment rests with the AMC. The circular requires the AMC to ensure that intraday borrowing is repaid by the end of the day.

If an amount converts into overnight borrowing, it must remain within the applicable regulatory limits and may be used only for the purposes allowed under Regulation 42(1). The classification of the facility as intraday therefore cannot be preserved merely by its original intention: an amount outstanding beyond the day must satisfy the rules applicable to overnight borrowing.

This makes end-of-day reconciliation a substantive compliance control. Treasury, operations and fund accounting teams will need timely visibility over receipts, borrowing drawdowns and repayment status, along with an escalation mechanism for delayed or failed receivables.

Board-approved policy and scheme-wise records

The boards of the AMC and the trustees must approve a policy governing use of the intraday borrowing facility. That policy must be published on the AMC’s website and must include, among other matters, the applicable approval processes and monitoring mechanism.

AMCs must also maintain scheme-wise records describing the underlying liquidity mismatch and the expected source of repayment. The requirement calls for more than aggregate reporting at the AMC or fund-house level: the rationale, amount and repayment source must be traceable to the individual scheme using the facility.

A workable policy should therefore allocate responsibility for initiating a borrowing request, verifying the receivable, authorising the drawdown, monitoring repayment and reporting exceptions. It should also distinguish receivable-backed borrowing from the additional facility available solely for specified unitholder payouts.

Who bears borrowing costs and losses

SEBI has placed the economic consequences of using the facility on the AMC rather than the scheme. In line with paragraph 11.10 of the Master Circular, any intraday borrowing cost must be borne by the AMC.

The AMC must also bear any loss or cost caused by an unforeseen event or a delay in receiving the guaranteed or non-guaranteed receivables identified in clauses 2.2.1 and 2.2.2. This protects scheme assets and unitholders from bearing the cost when an expected same-day receipt does not materialise on schedule.

For finance and accounting teams, the allocation rule means borrowing charges and delay-related losses should not be passed through to the scheme. Systems and accounting policies must be capable of identifying such costs and recording them at the AMC level.

Other compliance requirements

AMCs must comply with clauses 6 and 7 of the Fourth Schedule to the SEBI (Mutual Funds) Regulations, 2026 and paragraph 17.7 of the March 20 Master Circular. The July circular was issued under Section 11(1) of the SEBI Act, 1992, read with Regulations 42(2) and 84 of the SEBI (Mutual Funds) Regulations, 2026.

Before September 1, fund houses will need to secure the required board approvals, publish their policies, configure scheme-wise records and test controls for authorisation, receivable verification, end-of-day repayment and overnight-borrowing exceptions. Trustees will also require suitable information to oversee whether the facility is being used for permitted purposes and within the prescribed conditions.

Key takeaway

SEBI’s framework gives mutual funds a wider but controlled tool for bridging genuine same-day settlement mismatches from September 1, 2026; the practical burden falls on AMCs to document each scheme’s need and repayment source, close borrowing by day-end, comply with overnight limits where necessary, and bear the associated borrowing costs and delay-related losses.