Document: Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2026
Notification No.: SEBI/LAD-NRO/GN/2026/307
Date of Notification: 3 July 2026
Effective Date: From the date of publication in the Official Gazette.
Executive Summary
The Securities and Exchange Board of India (SEBI) has amended Regulation 42(2) of the SEBI (Mutual Funds) Regulations, 2026 to expressly permit intraday borrowing by mutual fund schemes for the limited purpose of addressing temporary timing mismatches between cash outflows and inflows. Such borrowing is permissible only in accordance with conditions that may be specified by SEBI.
The amendment provides greater operational flexibility to mutual funds while ensuring that borrowing remains a temporary liquidity management tool rather than a source of leverage.
Background
Under the Mutual Funds Regulations, borrowing by mutual fund schemes has traditionally been tightly regulated to ensure that investor money is not exposed to unnecessary financial risks.
Prior to this amendment, the regulations imposed restrictions on borrowing by mutual funds except under specified circumstances. However, practical operational situations often result in temporary mismatches between:
- Redemption payments to investors (cash outflows), and
- Receipt of sale proceeds or other inflows into the scheme.
This amendment addresses that operational issue.
Key Amendment
SEBI has substituted Regulation 42(2) with the following provision:
Nothing contained in Regulation 42(1) shall restrict mutual funds from undertaking intraday borrowing to address timing mismatches between the outflows and inflows of a scheme, subject to conditions specified by SEBI.
Purpose of the Amendment
The amendment seeks to:
- Facilitate smooth day-to-day cash management.
- Enable timely settlement of redemption obligations.
- Prevent operational disruptions arising solely due to settlement timing differences.
- Improve liquidity management without permitting structural borrowing.
Importantly, the amendment does not permit mutual funds to borrow for investment purposes or to enhance portfolio returns.
Practical Implications
1. Improved Liquidity Management
Fund houses can now temporarily bridge cash-flow mismatches occurring within the same trading day.
Example:
- Investors redeem units in the morning.
- Securities sold to generate cash settle later in the day.
- The mutual fund may undertake intraday borrowing until settlement proceeds are received.
This ensures uninterrupted redemption payments.
2. Enhanced Operational Efficiency
Asset Management Companies (AMCs) will be able to manage settlement cycles more efficiently without delaying investor payments.
This is particularly useful where:
- Large institutional redemptions occur.
- Settlement cycles create temporary liquidity gaps.
- Banking cut-off timings affect cash availability.
3. Investor Protection
The amendment strengthens investor confidence because:
- Redemption proceeds can be paid on time.
- Operational liquidity issues are less likely to affect investors.
- Borrowing remains temporary and tightly regulated.
4. No Change in Investment Risk Profile
The amendment does not permit:
- Long-term borrowing;
- Leveraged investing;
- Speculative financing; or
- Borrowing for portfolio expansion.
The borrowing is solely intended to manage intraday operational cash-flow mismatches.
Regulatory Safeguards
The amendment specifically states that intraday borrowing will be subject to conditions prescribed by SEBI.
This indicates that SEBI retains regulatory oversight regarding matters such as:
- Eligible borrowing arrangements;
- Maximum permissible limits;
- Duration of borrowing;
- Reporting requirements;
- Risk management controls; and
- Compliance obligations.
These conditions are expected to be specified through separate circulars or operational guidelines.
Impact on Stakeholders
Asset Management Companies (AMCs)
- Greater flexibility in treasury operations.
- Reduced settlement-related operational risks.
- Better management of redemption obligations.
Trustees
Trustees will need to ensure that borrowing is undertaken strictly within SEBI's prescribed framework and remains limited to genuine timing mismatches.
Investors
The amendment is beneficial to investors as it promotes:
- Timely redemption payments;
- Improved operational efficiency; and
- Continued regulatory safeguards against excessive borrowing.
Governance and Compliance Considerations
AMCs should consider:
- Updating internal treasury policies.
- Revising liquidity management frameworks.
- Strengthening internal controls around intraday borrowing.
- Maintaining appropriate documentation evidencing timing mismatches.
- Ensuring compliance with future SEBI-prescribed conditions.
Key Takeaways
- SEBI has amended Regulation 42(2) of the Mutual Funds Regulations, 2026.
- Mutual funds are now expressly permitted to undertake intraday borrowing.
- Such borrowing is permitted only to address temporary timing mismatches between scheme inflows and outflows.
- The borrowing remains subject to conditions specified by SEBI.
- The amendment enhances operational flexibility while maintaining investor protection and prudent risk management.
Conclusion
The amendment represents a pragmatic refinement of India's mutual fund regulatory framework. Rather than relaxing borrowing restrictions generally, SEBI has introduced a narrowly tailored exception that recognises the operational realities of modern fund management. By permitting regulated intraday borrowing to address temporary liquidity mismatches, the amendment is expected to improve settlement efficiency, ensure timely redemption payments, and strengthen the operational resilience of mutual fund schemes without compromising the fundamental principle that mutual funds should remain largely free from leverage. Overall, the change reflects SEBI's continuing emphasis on balancing operational flexibility with robust investor protection and prudent market regulation.
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