SEBI Permits Net Settlement of Funds for Mutual Fund Cash Market Transactions Effective April 2027

The Securities and Exchange Board of India (SEBI) has issued a circular allowing mutual fund schemes to adopt net settlement of funds for outright transactions in the cash market. The new framework will come into effect from April 2027.

According to the regulatory guidelines, the move is designed to reduce temporary funding requirements, improve liquidity management, and enhance operational efficiency for asset management companies (AMCs). Under this framework, mutual fund schemes can net their purchase and sale fund obligations arising from eligible transactions within the same settlement cycle.

The regulator stated that this adjustment is expected to ease the funding requirements of mutual fund schemes by lowering the capital that needs to be arranged temporarily for settling equity market transactions. It is also intended to improve the efficiency of fund deployment and cash management, particularly for schemes that handle large volumes of portfolio transactions.

However, SEBI has specified that netting will only be permitted at the level of an individual mutual fund scheme and strictly within the same settlement cycle. AMCs are prohibited from adjusting obligations across different schemes or portfolios managed under the same mutual fund.

Importantly, the regulator has chosen to retain the gross settlement of securities while permitting the net settlement of funds.

The framework establishes specific criteria for an outright transaction, defining it as either a purchase or a sale of a particular security during a specific settlement cycle, but not both. If a scheme executes both purchase and sale transactions in the same security within the same settlement cycle, those transactions will be categorized as non-outright and will consequently not qualify for net settlement.

This distinction remains critical for fund managers, who will continue to settle non-qualifying transactions on a gross basis. Where outright sale proceeds fall short of outright purchase obligations, the respective scheme will be required to fund the difference. Similarly, excess proceeds generated from outright sales cannot be offset against non-outright purchase obligations, which will continue to necessitate separate funding.

To safeguard the interests of investors, SEBI has mandated that AMCs and custodians must establish robust systems capable of identifying eligible transactions, tracking gross and net fund obligations, and maintaining clear audit trails. Furthermore, trustees will be responsible for reviewing the implementation to ensure that the framework consistently serves unit holders' interests.

The Association of Mutual Funds in India (AMFI), working in consultation with relevant stakeholders, will formulate standard implementation guidelines covering reporting, reconciliation, settlement timelines, and audit requirements.

"The regulatory shift by SEBI to allow net settlement of funds for mutual funds is a positive step toward optimizing operational efficiency and capital management for asset management companies. By reducing temporary funding pressures for outright cash market transactions, fund managers can deploy capital more effectively while maintaining strict compliance and audit trails. As the industry prepares for the April 2027 implementation alongside AMFI guidelines, this framework will strengthen liquidity management without compromising investor safeguards." — Dr. Shishir Gupta, Founder & CEO, StartupLanes