The Securities and Exchange Board of India (Sebi) has proposed allowing mutual fund schemes to settle cash obligations from stock-market transactions on a net basis, while keeping settlement of securities on a gross, delivery-based basis.
The consultation paper issued on Thursday is aimed at reducing temporary liquidity requirements and improving settlement efficiency for mutual fund schemes. Under the current framework, mutual fund trades are settled on a gross basis. This means a scheme has to arrange money for its purchases separately, even if it is also due to receive money from sales in the same settlement cycle.
The market regulator has proposed allowing net settlement of funds for outright transactions carried out by mutual fund schemes on recognised stock exchanges. An outright transaction means that a mutual fund either buys or sells a particular security during a settlement cycle, but does not do both.
For example, if a scheme buys securities worth ₹100 crore and has eligible sales worth ₹90 crore, it could settle the net cash requirement of ₹10 crore instead of arranging the full purchase amount separately. The proposal, however, does not allow this for every transaction.
If a mutual fund both buys and sells the same security during the same settlement cycle, those transactions will not qualify for netting. They will continue to be settled on a gross basis.
The proposed change applies only to the cash part of settlement. The securities themselves will continue to be settled on a gross and delivery-based basis. Sebi said this would ensure that the delivery-backed nature of institutional trades is not changed.
The netting will also be allowed only within an individual mutual fund scheme. A mutual fund will not be allowed to use the obligations of one scheme to offset those of another scheme. The AMC, mutual fund and custodian will have to ensure that scheme-wise accounting, daily NAV calculation, asset allocation, investment limits and unit-holder interests are not affected.
If a scheme’s eligible purchase obligations are higher than its eligible sale proceeds, it will have to fund the remaining amount. Any external funding will continue to be governed by the existing rules on borrowing by mutual funds.
Sebi said the proposal could help reduce temporary liquidity pressure, especially during index rebalancing and periods of large subscriptions or redemptions. The move comes after the market regulator allowed FPIs to net their trades in its latest board meeting in June.
The regulator has invited public comments on the proposal until 24 September.
