The Securities and Exchange Board of India (Sebi) has permitted mutual fund schemes to net their fund settlement obligations for outright cash market transactions, a move aimed at reducing temporary funding requirements and improving operational efficiency.
In a circular issued on Thursday, the market regulator said that mutual fund schemes will be allowed to offset eligible purchase and sale obligations within the same scheme and settlement cycle. The rules will come into effect from 1 April 2027.
Currently, institutional investors are required to settle their cash market transactions on a gross basis at the custodian or client level, with trades being delivery-backed. Sebi’s latest move changes the treatment of fund obligations for eligible mutual fund transactions, without altering the requirement for securities to be settled on a gross basis.
An outright transaction is either a purchase or a sale in a particular security during the same settlement cycle, but not both. If a mutual fund scheme undertakes both purchase and sale transactions in the same security within a settlement cycle, those trades will be classified as non-outright transactions and will not qualify for net settlement.
Framework
The framework also restricts netting to transactions within an individual mutual fund scheme. Funds cannot offset obligations across different schemes of the same mutual fund, and no inter-scheme funding or adjustment will be allowed.
Where outright purchase obligations exceed outright sale proceeds, the concerned scheme will have to fund the residual amount. Similarly, excess proceeds from outright sales cannot be used to meet non-outright purchase obligations, which will continue to be funded separately on a gross basis.
The circular clarifies that securities transaction tax and stamp duty will continue to be levied on a delivery basis. Derivatives, securities lending and borrowing, short sale-related transactions and other transactions not explicitly covered will remain outside the framework.
The implementation standards for the new norms will be determined by the industry body, Association of Mutual Funds in India (Amfi).
Clearing Corporations and Stock Exchanges have been asked to make the necessary changes to their systems, processes, files, and reporting formats to facilitate implementation. The manner of settlement between custodians and Clearing Corporations will remain unchanged.
