SEBI proposes net fund settlement for mutual funds

The Securities and Exchange Board of India (SEBI) has issued a consultation paper proposing a new framework to allow mutual fund schemes to net certain cash-market fund obligations. The initiative aims to reduce temporary liquidity requirements and improve settlement efficiency for institutional investors.

Under the current system, cash market transactions are settled on a gross basis at the scheme level, requiring funds for purchases to be arranged independently of sale receivables within the same settlement cycle. This can create operational inefficiencies and liquidity strain, particularly during index rebalancing or periods of high investor subscriptions and redemptions.

The proposed mechanism would allow mutual funds to offset eligible outright purchases against eligible outright sales within the same settlement cycle. However, the underlying securities would continue to be settled on a gross basis to maintain the delivery-backed nature of institutional trades. SEBI noted that transactions involving the same security bought and sold during the same cycle would be excluded from netting and must continue to be settled on a gross basis.

This proposal follows a similar framework introduced for Foreign Portfolio Investors (FPIs). SEBI has invited public comments on the proposal until September 24.