SEBI Circular No. HO/(92)2026-IMD-POD-2/I/16006/2026 dated July 10, 2026
Executive Summary
The Securities and Exchange Board of India (SEBI) has issued a significant circular introducing an intraday borrowing facility for mutual funds to address temporary liquidity mismatches arising primarily from differences in market settlement cycles. The circular follows the amendment to the SEBI (Mutual Funds) Regulations, 2026, notified on July 3, 2026, and supersedes the earlier borrowing guidelines contained in the SEBI Master Circular dated March 20, 2026 and SEBI Circular dated March 25, 2026.
Unlike conventional borrowing, which is tightly regulated and intended only for exceptional circumstances, the newly introduced framework allows same-day borrowings for specified operational purposes while ensuring that such borrowings do not expose investors to additional costs or undue risks.
The provisions shall become effective from September 1, 2026.
Background
Mutual fund schemes routinely experience temporary timing mismatches between cash inflows and payment obligations. Examples include:
- Redemption proceeds becoming payable before settlement receipts are credited.
- Investments requiring payment while subscription money is still under processing.
- Margin obligations or foreign exchange settlements occurring before expected receipts.
Previously, AMCs often had to rely on overnight borrowing provisions or maintain higher idle liquidity. The new framework addresses these operational inefficiencies by permitting intraday borrowing, thereby improving liquidity management without compromising investor protection.
Key Provisions
1. Permitted Uses of Intraday Borrowing
Mutual Funds may avail intraday borrowings for the following purposes:
- Payment of redemption proceeds to investors.
- IDCW (Income Distribution cum Capital Withdrawal) payments.
- Interest payments.
- Settlement of investments made by schemes.
- Mark-to-market (MTM) obligations.
- Foreign exchange settlements.
- Repayment of existing borrowings.
Analysis
SEBI has clearly limited the facility to operational liquidity requirements rather than allowing borrowings for portfolio leverage or speculative activities. The emphasis remains on facilitating smooth fund operations.
2. Limits on Quantum of Borrowing
The circular prescribes three categories:
(a) Guaranteed Receivables
Borrowing may be backed by receivables such as:
- RBI settlements
- Clearing Corporation inflows
- Subscription amounts already credited into scheme bank accounts
(b) Non-Guaranteed Receivables
Borrowings may also be based upon receivables expected during the day, including:
- Maturity proceeds
-
Settlement proceeds from:
- Non-convertible debentures (NCDs)
- Commercial Papers (CPs)
- Certificates of Deposit (CDs)
- OTC Swaps
provided such receivables are expected before the end of the day.
(c) Additional Borrowing
AMCs may borrow beyond the above receivables solely for meeting:
- Redemption obligations
- Other investor pay-outs permitted under Regulation 42(1).
Analysis
The framework balances operational flexibility with prudence by linking borrowing primarily to identifiable cash inflows while allowing limited additional borrowing to protect investor redemption rights.
3. Mandatory Same-Day Repayment
AMCs must ensure:
- Entire intraday borrowing is repaid before the close of business.
- If any borrowing extends overnight, it must comply with existing regulatory limits governing overnight borrowings.
Analysis
This is perhaps the most critical safeguard.
SEBI has ensured that the facility remains genuinely "intraday" and does not become an indirect route for longer-term leverage.
4. Governance Framework
Boards of:
- Asset Management Companies (AMCs)
- Trustees of Mutual Funds
must approve a formal policy governing intraday borrowing.
The policy should include:
- Approval process
- Monitoring mechanisms
- Internal controls
The approved policy must also be hosted on the AMC's website.
Analysis
This strengthens corporate governance by ensuring board-level oversight and transparency.
5. Record Maintenance
AMCs are required to maintain scheme-wise documentation covering:
- Nature of liquidity mismatch
- Source of expected repayment
- Supporting records for each borrowing transaction.
Analysis
This enhances auditability and regulatory supervision while enabling SEBI to monitor the appropriateness of facility usage.
6. Continued Regulatory Compliance
The circular clarifies that AMCs must continue complying with:
- Clauses 6 and 7 of the Fourth Schedule of SEBI (Mutual Funds) Regulations, 2026
- Paragraph 17.7 of the SEBI Master Circular.
This ensures the new facility supplements—not replaces—the existing risk management framework.
7. Cost of Borrowing
One of the most investor-friendly provisions is that:
- Any borrowing cost shall be borne entirely by the AMC.
- Any losses arising from delays in expected receivables shall also be borne by the AMC.
Analysis
This provision ensures that investors are insulated from operational inefficiencies of the AMC.
Regulatory Philosophy
The circular reflects SEBI's evolving approach towards modern liquidity management.
Historically, borrowings by mutual funds have been viewed conservatively due to concerns over leverage and investor protection. However, with increasingly sophisticated settlement systems and larger transaction volumes, temporary liquidity mismatches have become an operational reality rather than an indicator of financial distress.
By permitting intraday borrowings within a tightly controlled framework, SEBI acknowledges these operational realities while preserving the fundamental principle that mutual funds should not employ borrowings as a means of enhancing investment returns.
Impact on Stakeholders
Asset Management Companies
AMCs will benefit from:
- Improved treasury management
- Better liquidity planning
- Reduced operational settlement risks
- Lower need for maintaining excess idle cash
However, they must invest in:
- Enhanced treasury systems
- Real-time liquidity monitoring
- Internal controls
- Documentation and audit trails
Trustees
Trustees will assume greater oversight responsibilities, particularly in:
- Reviewing borrowing policies
- Monitoring compliance
- Ensuring investor interests remain protected
Investors
Investors stand to benefit through:
- Faster redemption processing
- Reduced settlement failures
- Improved operational efficiency
- No additional borrowing costs being passed on to schemes
Regulators
SEBI gains:
- Greater transparency
- Better monitoring capability
- Standardized governance across AMCs
- Stronger investor protection mechanisms
Compliance Checklist for AMCs
Before September 1, 2026, AMCs should:
- Draft and obtain Board-approved Intraday Borrowing Policy.
- Obtain Trustee approval.
- Update treasury and liquidity management systems.
- Establish real-time monitoring mechanisms.
- Maintain scheme-wise documentation.
- Publish policy on AMC website.
- Ensure accounting systems separately identify intraday borrowings.
- Train treasury, compliance, and operations teams.
- Review internal audit procedures for monitoring compliance.
Key Takeaways
- SEBI has formally introduced intraday borrowing for mutual funds to address short-term operational liquidity mismatches.
- The facility is restricted to specified operational purposes and is not intended for leveraging investment portfolios.
- Borrowings must ordinarily be repaid on the same day, with any overnight extension subject to existing regulatory limits.
- Governance has been strengthened through mandatory Board- and Trustee-approved policies, public disclosure, and robust record-keeping.
- Borrowing costs and any losses due to delayed receivables must be borne by the AMC, ensuring investors are not disadvantaged.
- The framework aims to enhance liquidity management while maintaining investor protection and market discipline.
Conclusion
The introduction of an intraday borrowing framework marks a pragmatic and progressive reform in India's mutual fund regulatory landscape. It acknowledges the practical realities of modern settlement cycles while preserving SEBI's long-standing emphasis on prudence, transparency, and investor protection. By combining operational flexibility with stringent governance requirements and explicit cost allocation to AMCs, the circular strikes a well-considered balance between efficiency and accountability. Its successful implementation from September 1, 2026, is expected to improve settlement efficiency, strengthen liquidity management practices, and enhance the resilience of the mutual fund ecosystem without compromising the interests of investors.
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