SEBI moves to ease mutual funds’ liquidity crunch with net settlement proposal
Proposed framework to allow scheme-level netting of cash obligations; share delivery to remain on gross basis
SEBI has also proposed that netting be permitted only within an individual mutual fund scheme. A fund house would not be allowed to offset the purchase obligations of one scheme against the sale obligations of another scheme.
Market regulator Securities and Exchange Board of India (SEBI) has proposed allowing mutual fund schemes to net their cash obligations arising from stock-market transactions, a move aimed at easing liquidity pressures on fund houses during periods of heavy portfolio churn.
Under the proposed framework, a mutual fund scheme would be allowed to offset outright purchases against outright sales across different securities within the same settlement cycle and settle only the net cash obligation.
The proposal is significant for mutual funds because they currently face gross settlement requirements even when their overall cash requirement is much lower. This can create a temporary funding mismatch during events such as index rebalancing or periods of large-scale subscriptions and redemptions.
Same-stock trades excluded
SEBI has, however, drawn a clear line around transactions that could resemble intraday trading. If a scheme buys and sells the same security on the same day, those obligations will not qualify for netting and will continue to be settled on a gross basis.
The proposed netting facility would apply only to outright transactions, where a scheme is either a buyer or a seller in a particular security during the day. Importantly, the relaxation is restricted to the cash leg of settlement. Securities delivery will continue to take place on a gross basis.
Scheme-level netting only
SEBI has also proposed that netting be permitted only within an individual mutual fund scheme. A fund house would not be allowed to offset the purchase obligations of one scheme against the sale obligations of another scheme.
The restriction is aimed at maintaining scheme-wise accounting and daily NAV calculations, while protecting the interests of individual scheme investors.
The proposal follows SEBI’s April 2026 move to provide similar settlement relief to Foreign Portfolio Investors (FPIs). SEBI’s Mutual Fund Advisory Committee had also examined extending comparable relief to domestic institutional investors.
SEBI has issued a draft circular along with the consultation paper and invited comments from stakeholders until September 24, 2026.