SEBI okays net fund settlement for MFs

SEBI clears net fund settlement for mutual fund schemes

India’s Securities and Exchange Board of India (SEBI) has approved a framework that will allow mutual fund schemes to net their fund settlement obligations for eligible cash market transactions. The new rules, set out in a circular dated 5 November 2026, will come into effect on 1 April 2027. The change is aimed at reducing temporary funding requirements for schemes and improving both operational and settlement efficiency in the cash segment of stock exchanges.

Under the framework, mutual fund schemes will be able to offset funds payable against receivables arising from specified transactions within the same scheme and settlement cycle. While fund obligations may be netted where conditions are met, the settlement of securities themselves will continue to take place on a gross, delivery-backed basis. This maintains existing securities delivery standards while altering only the treatment of cash legs for qualifying trades.

Scope of eligible transactions and definition of outright trades

Net settlement is limited to outright transactions undertaken by mutual fund schemes in the cash market. Outright transactions are defined as either a purchase or a sale of a security, but not both, in the same settlement cycle for a given scheme. Where a scheme both buys and sells the same security within a settlement cycle, those trades are classified as non-outright transactions and are excluded from the netting facility.

Within an eligible scheme and settlement cycle, outright purchase obligations and outright sale proceeds may be netted for fund settlement. If outright purchase obligations exceed sale proceeds, the residual amount must still be funded by the scheme. Conversely, excess proceeds from outright sales cannot be used to meet non-outright purchase obligations, which must continue to be settled on a gross fund basis.

Restrictions on cross-scheme netting and excluded products

Netting is confined strictly to scheme-level obligations. The framework does not permit offsetting obligations across different schemes of the same mutual fund, and no inter-scheme funding or adjustment is allowed. Asset management companies and custodians are required to maintain scheme-wise accounting, keep audit trails, and ensure there is no cross-scheme adjustment of obligations.

A range of transactions is explicitly outside the scope of the new facility. Derivative transactions, securities lending and borrowing, and short sale-related trades are excluded, as are any other transactions not expressly covered in the circular. For these activities, both funds and securities will continue to be handled under existing gross settlement arrangements.

Implementation framework and market infrastructure readiness

SEBI has asked the Association of Mutual Funds in India (AMFI) to formulate detailed implementation standards for the net settlement framework. AMFI will do this in consultation with clearing corporations, stock exchanges, custodians, and other stakeholders. The circular also includes an illustration showing how eligible netting can lower funding requirements while retaining gross settlement for non-outright transactions.

Clearing corporations and stock exchanges have been instructed to make necessary changes to their systems, processes, files, and reporting formats to support the new regime. The manner of settlement between custodians and clearing corporations will remain unchanged, with the main adjustment focused on enabling scheme-level fund netting where conditions are satisfied.