The market regulator, Securities and Exchange Board of India (SEBI), on Thursday proposed a significant shift in the operational framework for mutual funds. The proposal suggests permitting the net settlement of funds for transactions undertaken by mutual fund schemes in the cash market, while maintaining the settlement of securities on a gross basis. This strategic move is designed to enhance settlement efficiency and mitigate temporary liquidity constraints faced by fund managers.

Addressing Liquidity and Operational Inefficiency

The proposal follows representations from market participants who highlighted that mutual fund schemes often face liquidity bottlenecks. Currently, fund obligations in the cash market are met on a gross basis at the scheme level, which can lead to operational inefficiencies. These challenges become particularly acute during index rebalancing periods, where passive funds must execute large-scale portfolio adjustments, or during periods of significant investor subscriptions and redemptions.

BozokMedia analysis shows that this move aligns with the existing framework allowed for Foreign Portfolio Investors (FPIs), aiming to streamline the movement of capital within the Indian markets. By allowing funds to be settled net, SEBI seeks to facilitate the ease of doing business without compromising on investor protection.

This regulatory shift is expected to significantly lower the cost of liquidity management for AMCs during volatile market sessions.

Regulatory Guardrails and Implementation

To ensure market integrity, SEBI has introduced several strict conditions. Net settlement will be permitted only at the level of an individual mutual fund scheme. Crucially, no netting will be allowed across different schemes managed by the same Asset Management Company (AMC). The responsibility lies with the AMC and the custodian to ensure that this framework does not impact scheme-wise accounting, valuation, or the computation of the daily Net Asset Value (NAV).

In instances where the value of outright sales is less than purchases, the scheme must fund the residual amount. Conversely, excess sale amounts will not be adjusted against purchase obligations from non-outright transactions. SEBI has requested the Association of Mutual Funds in India (AMFI) to formulate implementation standards in consultation with relevant stakeholders.

Historical Background

Historically, the requirement for gross settlement of funds has forced mutual funds to maintain higher cash buffers to meet immediate obligations. As the Indian mutual fund industry grows in scale and complexity, the transition toward more efficient settlement mechanisms like net settlement becomes essential for maintaining market stability.

Frequently Asked Questions

1. Will this change affect the NAV of my mutual fund?
No, SEBI has explicitly stated that existing safeguards regarding valuation and NAV computation will remain unaffected.

2. When will this new rule be implemented?
SEBI has invited public comments until September 24, 2026. The final implementation will depend on the review of these suggestions.