Capital markets regulator SEBI proposed allowing mutual funds to use intraday borrowing facilities for a wider range of liquidity management purposes, beyond redemption payouts, to help fund managers address timing mismatches in cash flows and improve operational flexibility. In a consultation paper, the Securities and Exchange Board of India (SEBI) said mutual funds currently use intraday borrowing facilities from banks to bridge temporary mismatches between payment obligations and receivables arising from trade settlements, redemptions and other transactions.

 

The regulator noted that the existing framework was introduced following representations from the Association of Mutual Funds in India (AMFI) and currently permits intraday borrowing primarily for meeting redemption and unitholder payout obligations.

 

SEBI said industry participants have highlighted operational challenges and sought broader recognition of intraday borrowing as a cash-flow management tool.

 

According to AMFI’s submission, mutual funds often face timing mismatches between payment obligations such as trade settlements, derivative margin requirements, foreign exchange settlements and redemption payouts, and the receipt of funds from various sources later in the day. Intraday borrowing enables schemes to meet such obligations in the morning and repay the borrowing before the close of business.

 

Under the proposal, asset management companies may be permitted to avail intraday borrowing facilities for purposes other than redemption and unitholder payouts, including trade settlements, forex obligations, derivative-related payments and repayment of existing borrowings.

 

The regulator has also proposed allowing intraday borrowings that are not limited to guaranteed receivables from entities such as the Government of India, the Reserve Bank of India and clearing corporations. Further, mutual funds may be allowed to borrow amounts exceeding receivables, provided such borrowings are extinguished by the end of the day or converted into overnight borrowings within prescribed regulatory limits.

 

SEBI said the inability to access intraday borrowing facilities could adversely affect fund management flexibility and scheme returns, as fund managers may be unable to deploy funds efficiently due to settlement timing constraints.

 

The regulator has proposed retaining the existing safeguard that any cost or charge incurred for availing intraday borrowings should be borne by the AMC and not by investors in the scheme.