SEBI's major decision for mutual funds; payment method to change effective April 1, 2027...

The Securities and Exchange Board of India (SEBI) has introduced a revised settlement framework that allows mutual funds to settle eligible buy and sell transactions in the equity cash market on a net-funds basis. Announced on November 5, 2026, this framework will come into effect on April 1, 2027. The move aims to reduce temporary liquidity requirements and improve settlement efficiency for mutual fund schemes.

Under the existing settlement framework, the purchase obligations of mutual fund schemes are typically met independently of the proceeds generated from the sale of securities. Consequently, schemes may face temporary liquidity requirements, even when they are simultaneously buying and selling securities within the same settlement cycle.

Under the revised framework, SEBI has permitted the offsetting of eligible cash obligations arising from distinct buy and sell transactions. This netting will be allowed at the level of individual mutual fund schemes, subject to specified conditions. However, this facility applies only to the settlement of funds, while the actual delivery and receipt of securities will continue to take place on a gross basis.

For example, consider a mutual fund scheme that purchases eligible securities worth ₹100 crore and sells eligible securities worth ₹80 crore within the same settlement cycle. Under the revised framework, the scheme would only need to meet a net cash obligation of ₹20 crore, rather than arranging funds separately for the full purchase obligation of ₹100 crore. This will reduce the amount of funds required on a temporary basis for settlement purposes.

However, SEBI has established certain restrictions for availing of this netting facility. Transactions can only be offset within the same mutual fund scheme, and both the buy and sell transactions must occur within the same settlement cycle. Furthermore, both transactions must qualify under the regulator’s specific definition of such transactions. Cash obligations cannot be netted across different schemes, whereas the delivery and receipt of securities will continue to take place on a gross basis.

Importantly, if a mutual fund scheme buys and sells the same security within the same settlement cycle, these transactions will not qualify as 'eligible transactions' and will, therefore, be excluded from the netting facility. Similarly, proceeds from 'eligible' sales cannot be used to offset purchase obligations arising from 'non-eligible' transactions.

The revised framework addresses an operational challenge faced by mutual funds—particularly equity schemes that frequently rebalance their portfolios by buying and selling securities. Under the previous arrangement, separate funding arrangements might have been required for these activities, even when sufficient cash was expected from sales within the same settlement cycle.

By allowing the net settlement of eligible transactions, SEBI aims to reduce temporary cash requirements and improve liquidity management. This change may also alleviate operational pressure on Asset Management Companies (AMCs) and custodians, especially those handling large daily transaction volumes. However, the actual benefit will depend on the frequency and volume of eligible buy and sell transactions executed by individual schemes.

This change is primarily operational in nature and does not directly enhance a scheme's investment returns or portfolio performance. SEBI has also maintained the existing treatment of Securities Transaction Tax (STT) and stamp duty, which will continue to apply on a delivery basis.

For mutual fund investors, this revised framework is unlikely to bring about any immediate changes to the process of purchasing or redeeming mutual fund units. This circular does not directly alter the calculation of Net Asset Value (NAV), investment objectives, redemption arrangements, or the market risk exposure of the schemes.

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