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Informist, Thursday, Sept. 3, 2026

 

--SEBI issues consultation paper on MF cash market net settlement of funds

--SEBI proposes net settlement of funds for MF cash market transactions

 

MUMBAI – The Securities and Exchange Board of India issued a consultation paper Thursday in which it proposed allowing net settlement of funds for cash market transactions of mutual funds. Foreign portfolio investors had recently received SEBI's approval to settle funds obligations from their cash market transactions on a net basis, although the deadline for implementation of the provisions of SEBI's Apr. 24 circular in this regard is Dec. 31.

 

In Thursday's consultation paper, SEBI said it had received representations from the mutual fund industry that their schemes faced temporary liquidity requirements and operational inefficiencies on their cash market transactions because fund obligations are met on a gross basis at the scheme level. The industry had told SEBI these issues become more pronounced for a scheme during days of large subscriptions or redemptions by investors and on index rebalancing days when passive funds have to buy or sell to effect portfolio changes to realign with the changed index composition.

 

"In such cases, a scheme has outright purchase obligations in some securities and outright sale receivables in others within the same settlement cycle, gross funding can result in avoidable liquidity deployment, despite the scheme having offsetting cash flows within the same cycle," according to the SEBI paper.

 

The proposed net settlement allowance for mutual funds is only for funds and settlement of securities shall continue to be carried out on a gross basis, SEBI said in the paper.

 

Allowing net settlement of funds for a mutual fund scheme can, however, make purchase confirmation by the scheme dependent on sale confirmation to its custodians, according to the SEBI paper. This can have the effect of an increase in custodian-level settlement risks due to timing gaps, SEBI said.

 

There is also a need to preserve scheme-wise integrity in the proposed net settlement framework for mutual funds, SEBI said. Therefore, the proposed netting shall not be permitted across different schemes of the same mutual fund, it said in the paper. "The AMC (asset management company) and custodian shall ensure that the proposed framework does not affect scheme-wise accounting, valuation, daily NAV (net asset value) computation, segregation of securities and funds, or unit-holder interest," the regulator said.

 

The consultation paper proposes net settlement of funds for a mutual fund's cash market transactions only for outright buy or sell trades executed on the stock exchanges. SEBI clarified that outright transaction would mean "either a purchase or a sale transaction, but not both, in a security in a settlement cycle undertaken by a mutual fund scheme".

 

Further, the securities transaction tax and stamp duty shall continue to be levied on delivery basis, as applicable, the securities market regulator said. SEBI has invited feedback from the public by Sept. 24 on the consultation paper's proposals.  End

 

Reported by Rajesh Gajra

Edited by Rajeev Pai

 

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