SEBI Permits Net Settlement of Mutual Fund Cash Trades from April 1, 2027 to Ease Liquidity Demands
In a major regulatory overhaul designed to streamline market operations, the Securities and Exchange Board of India (SEBI) has permitted mutual fund schemes to settle the fund leg of their cash market equity transactions on a net basis, effective April 1, 2027.
The circular issued by the market regulator extends a facility previously granted to Foreign Portfolio Investors (FPIs), bringing parity to domestic institutional fund houses. Under the existing settlement architecture, mutual funds are required to fund gross pay-in obligations separately for every buy trade, even if they have substantial receivable proceeds from sale transactions maturing in the same settlement cycle.
Core Mechanism of the Netting Framework
The newly formulated mechanism permits mutual fund houses to offset fund receivables against fund payables for eligible cash market trades within the same settlement cycle. However, SEBI has maintained strict guardrails to prevent day trading, speculative churn, and cross-subsidization between portfolios:
Key Features of the New Settlement Rules:
- Scheme-Level Ring-Fencing: Netting is strictly allowed only at the level of an individual mutual fund scheme. Cross-scheme netting or using one scheme’s sale proceeds to fund another scheme’s buy obligations is completely prohibited.
- Outright Trades Only: An eligible "outright transaction" is defined as either a purchase or a sale of a specific security during a settlement cycle, but not both. If a fund scheme executes both buy and sell orders in the same scrip within the same cycle, those trades are deemed non-outright and must be settled on a gross cash basis.
- Delivery-Backed Mandate Intact: Securities settlement between mutual funds and their custodians will continue on a gross basis. The underlying requirement that institutional cash-market trades remain 100% delivery-backed remains unchanged.
- Treatment of Residual Obligations: If outright purchases exceed sales, the scheme must fund the net shortfall. Conversely, excess cash proceeds from outright sales cannot be diverted to cover non-outright purchase obligations.
- Taxation and Levies: Statutory charges, including the Securities Transaction Tax (STT) and stamp duty, will continue to be levied on a gross delivery basis.
The framework explicitly excludes derivative contracts, securities lending and borrowing (SLB) transactions, and short sales.
Why the Move Matters for Domestic Investors
For Indian mutual fund investors, the introduction of fund netting solves a long-standing operational inefficiency. Under gross settlement, fund managers often maintain larger cash cushions or resort to temporary credit lines to meet gross intraday and settlement payout obligations.
By enabling netting of fund flows, fund managers can significantly lower their temporary working capital requirements. This minimizes the cash drag on equity portfolios—allowing a higher percentage of investor capital to remain actively deployed in the market, which can translate into improved long-term portfolio yields.
Implementation and Industry Timeline
SEBI has directed asset management companies (AMCs), custodians, stock exchanges, and clearing corporations to upgrade their infrastructure and reporting systems ahead of the April 1, 2027 rollout.
The Association of Mutual Funds in India (AMFI), in consultation with clearing corporations and other market intermediaries, will formulate operational and implementation standards. These guidelines will detail file formats, reconciliation protocols, and audit trail mechanisms to ensure unit-holder asset allocation, net asset value (NAV) calculations, and statutory investment limits remain fully protected.
