SEBI proposes net settlement for mutual fund trades in cash market to ease liquidity strains

NEW DELHI: The Securities and Exchange Board of India (SEBI) has issued a consultation paper for a proposal to permit net settlement of funds for transactions undertaken by mutual fund schemes in the cash market, aiming to ease liquidity strains while retaining gross settlement of securities. The market watchdog noted that the initiative seeks to balance business facilitation with regulatory safeguards.

“The proposal is intended to facilitate ease of doing business, improve settlement efficiency and reduce temporary liquidity requirements for mutual fund schemes, while ensuring that existing safeguards relating to delivery-based settlement, scheme-wise accounting, valuation and investor protection remain unaffected,” the consultation paper stated.

Under existing norms, institutional transactions in the cash market are delivery-backed and grossed at the custodian level, requiring mutual fund schemes to arrange funds for purchases independently of sale receivables within the same settlement cycle.

SEBI noted that this current structure leads to liquidity pressures, operational inefficiencies, and reliance on short-term funding arrangements, particularly during index rebalancing or heavy investor subscription and redemption phases.

The proposal follows a similar framework introduced on April 24 for Foreign Portfolio Investors (FPIs), which is set for implementation by December 31. The regulator noted that the Mutual Fund Advisory Committee (MFAC) also recommended net settlement for domestic institutional investors.

Detailing the mechanics of the proposed netting system, the regulator clarified the exact scope of trades eligible for the mechanism. “Transactions in securities with only outright purchase or only outright sale in a settlement cycle may be netted to arrive at the net fund obligation of the concerned mutual fund scheme,” SEBI stated in the consultation paper.

The consultation paper further added, “Transactions in securities having both purchase and sale transactions in the same settlement cycle shall be excluded from netting and shall continue to be settled on a gross basis”.

To ring-fence risks, SEBI proposed strict boundaries regarding how asset management companies handle portfolio books, specifying that netting will apply exclusively at the scheme level. “No netting shall be permitted across different schemes of the same mutual fund,” the document stated, adding that the mechanism must not interfere with scheme-wise accounting, valuation, daily Net Asset Value (NAV) computation, or unit-holder interests.

The regulator stated that delivery-based obligations, Securities Transaction Tax (STT), and stamp duty will continue on a gross basis. Operational standards covering file formats, audit trails, and trade reconciliations will be formulated by the Association of Mutual Funds in India (AMFI) alongside custodians and clearing corporations.

SEBI has invited public comments and stakeholder feedback on the draft circular proposals until September 24. (ANI)