Sebi mandates board approval, clarifies cap on intraday borrowing for mutual funds

The Securities and Exchange Board of India (Sebi) has formalized a framework for intraday borrowing by mutual funds, allowing them to temporarily take money without an upper limit to manage same-day liquidity mismatches.

In a circular issued on Friday, the regulator mandated board approvals and disclosures, and clarified the circumstances under which mutual funds can temporarily borrow from banks.

Mutual funds are generally allowed to borrow up to 20% of a scheme’s net assets, with the duration of such borrowings not exceeding six months. This ceiling will not apply to intraday borrowing carried out to meet redemption payouts, Sebi said.

To be sure, mutual funds already borrow intraday without an upper limit. However, the borrowing amount and the absence of a limit were not solidified in regulations.

The change will come into effect on 1 April. It was introduced in a gazette notification for the new Sebi (Mutual Funds) Regulations, 2026, in January.

Mutual funds engage in intraday borrowing to maintain liquidity for redemption payments for liquid and overnight schemes.

Redemption proceeds for the schemes are typically paid to investors on the morning of T+1, while maturity proceeds from instruments such as Tri-Party Repo Dealing System (TREPS) or reverse repo transactions are received only later in the day. This can create a temporary cash crunch, which is often resolved through short-term borrowing arrangements with banks.

Sebi said the absence of the cap does not imply unrestricted borrowing. Intraday borrowing should not exceed guaranteed receivables expected on the same day from the central government, the Reserve Bank of India and the Clearing Corporation of India Ltd.

Approval and disclosure

The board of the asset management company (AMC) and the board of trustees are required to approve a policy for intra-day borrowing, which must be disclosed on the mutual fund’s website.

The regulator said AMCs have to absorb any costs arising from such borrowing. Any charges or losses caused by delays or unforeseen events in receiving the expected funds must be borne by the AMC.

Sebi clarified that equity-oriented index funds and exchange-traded funds may borrow temporarily if their sell trades remain under-executed on stock exchanges, but only for participation in the closing auction session in the equity cash segment, which was introduced by the market regulator in January.