SEBI proposes mutual fund cash-market netting to cut liquidity pressure
Synopsis
SEBI wants to let mutual fund schemes offset buy and sell obligations within the same settlement cycle — without changing how the underlying securities actually settle. It is a targeted fix for a liquidity squeeze that hits passive funds hardest during index rebalancing, and it mirrors a framework already in place for foreign portfolio investors.
Key Takeaways
SEBI proposed on 3 September to allow mutual fund schemes to net cash-market fund obligations within the same settlement cycle.
Underlying securities will continue to be settled on a gross basis — only the fund obligation is netted.
Netting is permitted only at the individual scheme level ; cross-scheme or cross-AMC offsets are not allowed.
Transactions where a scheme buys and sells the same security in the same cycle are excluded from netting.
A similar net settlement framework already exists for foreign portfolio investors (FPIs) .
Public comments on the consultation paper are due by 24 September .
The Securities and Exchange Board of India (SEBI) on Thursday, 3 September proposed allowing mutual fund schemes to net certain cash-market fund obligations, a move designed to reduce temporary funding requirements and sharpen settlement efficiency for institutional investors. The regulator has invited public comments on the proposal by 24 September, according to a consultation paper released from Mumbai.
What SEBI Is Proposing
Under the draft framework, a mutual fund scheme would be permitted to offset eligible outright purchases against eligible outright sales within the same settlement cycle. Critically, the underlying securities would continue to be settled on a gross basis, preserving the delivery-backed character of institutional trades and ensuring no change to actual stock movements.
The proposed netting mechanism would apply exclusively to outright transactions executed through a recognised stock exchange in the cash market. Where a scheme buys and sells the same security within the same settlement cycle, those transactions would be excluded from netting and would remain on a gross settlement basis.
Why the Regulator Is Acting Now
SEBI noted that mutual fund schemes currently face temporary liquidity requirements and operational inefficiencies because cash-market obligations are settled on a gross basis at the scheme level. These pressures intensify during index rebalancing events — when passive funds execute large portfolio adjustments simultaneously — and during periods of significant subscriptions or redemptions.
Notably, SEBI had already permitted a net settlement of funds framework for foreign portfolio investors (FPIs) and is now proposing a suitably tailored version for mutual funds, subject to appropriate safeguards. This signals a broader regulatory push toward settlement efficiency across institutional investor categories.
Key Safeguards and Boundaries
The regulator has proposed that netting be permitted only at the individual scheme level. Mutual funds would not be allowed to offset obligations across different schemes managed by the same asset management company (AMC), nor make cross-scheme or cross-portfolio adjustments.
SEBI has stipulated that the AMC, the mutual fund, and the custodian must collectively ensure that the proposed mechanism does not affect scheme-level accounting, net asset value (NAV) calculations, asset allocation requirements, investment limits, or the interests of unit holders.
What Happens Next
Market participants and stakeholders have until 24 September to submit comments on the consultation paper. If adopted, the framework would represent a meaningful operational upgrade for passive funds in particular, easing the cash crunch that typically accompanies large-scale index rebalancing. Final guidelines are expected after SEBI reviews the public feedback.
Point of View
And the scheme-level restriction is a sensible guardrail against cross-fund arbitrage. The real question is implementation: custodians and AMCs will need system upgrades, and the NAV-neutrality requirement means the back-office burden shifts rather than disappears. If the safeguards hold, this could meaningfully reduce the temporary borrowing that passive schemes routinely resort to around rebalancing dates.
NationPress
3 Sept 2026
Frequently Asked Questions
What is SEBI's mutual fund cash-market netting proposal?
SEBI has proposed allowing mutual fund schemes to offset eligible outright purchases against eligible outright sales within the same settlement cycle, reducing the net cash obligation the scheme needs to fund. The underlying securities would still settle on a gross basis, leaving actual stock deliveries unchanged.
Why is SEBI proposing this change?
Mutual fund schemes currently face temporary liquidity pressure and operational inefficiencies because cash-market obligations are settled on a gross basis at the scheme level. The strain is particularly acute during index rebalancing events and periods of heavy subscriptions or redemptions.
Who is affected by the proposed netting framework?
The framework would apply to all mutual fund schemes that execute outright transactions in the cash market through a recognised stock exchange, with passive or index funds likely to benefit most given their high-volume rebalancing activity.
What safeguards has SEBI built into the proposal?
Netting is restricted to the individual scheme level — cross-scheme or cross-AMC offsets are not permitted. AMCs, mutual funds, and custodians must ensure the mechanism does not affect NAV calculations, asset allocation limits, investment restrictions, or unit-holder interests.
When is the deadline to comment on the SEBI consultation paper?
SEBI has invited public comments on the proposal by 24 September. Final guidelines are expected after the regulator reviews stakeholder feedback.
