SEBI Approves Net Settlement of Cash Market Trades for Mutual Funds Effective April 2027
In a major operational reform for India’s domestic asset management industry, the Securities and Exchange Board of India (SEBI) has permitted mutual fund schemes to settle their cash market fund obligations on a net basis, with the framework coming into effect from April 1, 2027.
The regulatory circular extends a relief mechanism that SEBI had previously granted to Foreign Portfolio Investors (FPIs) under an April 24, 2026 framework. Under the existing institutional settlement rules, mutual funds have been required to fund all purchase transactions on a gross basis with custodians, even when they held offsetting sale receivables settling within the very same settlement cycle.
Resolving Friction in Portfolio Rebalancing
Until now, the mandatory gross funding of cash-market trades created transient liquidity bottlenecks for fund managers. When an equity scheme sold ₹100 crore worth of shares and bought ₹90 crore worth of different shares on the same day, it was required to arrange the entire ₹90 crore in cash for settlement before receiving the ₹100 crore sale proceeds.
This dynamic forced mutual funds to hold precautionary cash buffers or seek short-term liquidity, creating an unnecessary "cash drag" on fund performance. The issue became particularly pronounced during large-scale index rebalancing cycles—frequent in passive index funds and exchange-traded funds (ETFs)—as well as during periods of substantial investor subscriptions and redemptions.
Under the newly approved net settlement framework, funds will settle only the differential cash balance for eligible transactions, freeing up liquidity for core investment strategies.
Key Conditions and Regulatory Safeguards
To prevent speculative day-trading and ring-fence investor capital, SEBI has circumscribed the netting facility with strict operational guardrails:
Core Features of the Framework:
- Outright Trades Only: Netting is restricted strictly to "outright" transactions, defined as an instance where a scheme undertakes either only a purchase or only a sale in a given security during a settlement cycle. Securities featuring both buy and sell legs within the same cycle are excluded and must settle gross.
- Strict Scheme-Level Segregation: Netting will be permitted exclusively at the individual mutual fund scheme level. No netting or adjustment of fund obligations is allowed across different schemes managed by the same asset management company (AMC).
- Securities Remain Delivery-Backed: The netting applies solely to fund (cash) obligations. Securities delivery and clearing will continue strictly on a gross, delivery basis.
- Taxes and Accounting Unaltered: Securities Transaction Tax (STT) and stamp duty will continue to be levied on a gross, delivery basis as applicable, while daily Net Asset Value (NAV) computation and scheme-wise accounting standards remain fully protected.
Implications for Indian Investors
For retail and institutional mutual fund unitholders across India, the decision removes an outdated structural friction. By harmonizing the cash settlement rules of domestic mutual funds with those of foreign institutional peers, the regulator ensures asset managers can deploy investor capital without keeping surplus funds idle solely to grease settlement wheels. Stock exchanges, clearing corporations, custodians, and the Association of Mutual Funds in India (AMFI) will finalize operational readiness ahead of the April 1, 2027 rollout.
