SEBI is now considering allowing intra-day borrowing for a wider set of uses, including trade settlement obligations, forex transactions, derivative margin requirements, and other liquidity needs
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Recently, SEBI proposed allowing mutual funds to use intra-day borrowings for purposes other than investor redemptions and payouts, while also deferring the implementation of guidelines on such borrowings until July 15. Rather than treating it as a last resort during redemption stress, SEBI now wants to recognise it as a legitimate, everyday cash management tool for AMCs. The consultation paper proposes that borrowing be permitted not just for redemptions, but also for trade settlements, foreign exchange obligations, derivative-related payments, and other operational liquidity needs. Borrowing need not be limited to receivables from sovereign or clearing entities; it can be based on overall expected inflows.Mutual funds are generally permitted to borrow up to 20 per cent of a scheme’s net assets for a maximum period of six months to meet requirements such as redemption payments, income distribution, or the settlement of certain trades. However, this 20 per cent limit does not apply to intra-day borrowings, provided they comply with specific conditions prescribed by SEBI. Under existing rules, intra-day borrowings may be used only for the repurchase or redemption of units or for the payment of interest, and the amount must not exceed the guaranteed receivables due on the same day from the government of India, the RBI, and the Clearing Corporation of India. This narrow scope created a very real problem.The regulator is now considering allowing intra-day borrowing for a wider set of uses, including trade settlement obligations, forex transactions, derivative margin requirements, and other liquidity needs. Funds could borrow even if they do not have incoming cash lined up, as long as they repay it before the day ends, with a cap of 20 per cent of the fund’s size on any borrowing held longer. For fund managers, this means executing trades in the morning without waiting for afternoon settlements, managing forex obligations without sitting on excess cash, and meeting margin calls without being forced to liquidate positions at unfavourable prices. Put simply, this move will improve the flow of funds into the market and prevent funds from having to sell their shares in a hurry. SEBI has also ensured this flexibility does not come at the investor’s expense. The fund company must pay any interest or expenses incurred on the loan, and this burden cannot be passed on to investors. All borrowings must be repaid on the same day; otherwise, the borrowing is treated as a normal loan subject to stricter rules.Way forwardSeveral unresolved questions need to be answered. Permitting borrowing based on overall expected inflows rather than guaranteed receivables is pragmatic. Still, it leaves undefined who validates those expectations, and what happens when a settlement is delayed or a counterparty fails to deliver. Expanding the scope to cover forex and derivative obligations also risks blurring the line between sound liquidity management and leveraged risk taking, particularly without clear disclosure obligations regarding how frequently and how much AMCs borrow. Any borrowing that spills over into overnight positions would be subject to existing caps of 20 per cent of net assets and a maximum tenure of six months, but repeated near-end-of-day rollovers, even within limits, could quietly mask deeper liquidity stress.The window till July 15 needs to be used well. SEBI, industry associations, and AMCs must work together to establish strong intraday reporting norms. This proposal brings India’s mutual fund regulations closer to global best practice, where intraday liquidity management is simply part of running a fund professionally. If implemented thoughtfully, it will make funds more resilient and shield investors from the damage of forced selling. If handled loosely, it could give AMCs a crutch that obscures real liquidity problems.Saravanan is a professor of finance and accounting at IIM Tiruchirappalli, and Williams is the Head of India at Sernova FinancialPublished on June 30, 2026
