SEBI Allows Netting of Mutual Fund Cash Trades from April 1, 2027; Here’s What Changes

The Securities and Exchange Board of India (SEBI) has introduced a revised settlement framework allowing Mutual Funds to settle eligible purchase and sale transactions in the equity cash market on a net funds basis. Announced on November 5, 2026, the framework will come into effect from April 1, 2027. The move aims to reduce temporary funding requirements and improve settlement efficiency for mutual fund schemes.

Under the existing settlement framework, purchase obligations of mutual fund schemes are generally fulfilled independently of the proceeds received from selling securities. Consequently, schemes may face temporary funding requirements even when they are buying and selling securities within the same settlement cycle.

Under the revised framework, SEBI has permitted the adjustment of eligible cash obligations arising from outright purchases and outright sales. Netting will be allowed at the individual mutual fund scheme level, subject to specified conditions. However, the facility will apply only to funds settlement, while the actual delivery and receipt of securities will continue on a gross basis.

For instance, consider a mutual fund scheme that purchases eligible securities worth Rs 100 crore and sells eligible securities worth Rs 80 crore during the same settlement cycle. Under the revised framework, the scheme will be required to meet a net cash obligation of Rs 20 crore instead of separately arranging funds for the entire Rs 100 crore purchase obligation. This will reduce the amount of money temporarily required for settlement.

However, SEBI has prescribed certain restrictions for availing of the netting facility. Transactions can be adjusted only within the same mutual fund scheme, and purchases and sales must take place within the same settlement cycle. Both transactions must also qualify under the regulator's definition of outright transactions. Cash obligations cannot be netted across different schemes, while securities delivery and receipt will continue separately on a gross basis.

Importantly, if a mutual fund scheme buys and sells the same security within a single settlement cycle, those transactions will not qualify as outright transactions and will therefore be excluded from the netting facility. Similarly, excess proceeds from eligible outright sales cannot be used to offset purchase obligations arising from non-outright transactions.

The revised framework addresses an operational challenge faced by mutual funds, particularly equity schemes that regularly rebalance their portfolios by purchasing and selling securities. Under the earlier arrangement, these activities could require separate funding arrangements even when sufficient cash was expected from sales within the same settlement cycle.

By permitting net settlement of eligible transactions, SEBI aims to reduce temporary cash requirements and improve liquidity management. The change could also ease operational pressure on asset management companies (AMCs) and custodians, particularly those handling large daily transaction volumes. However, the benefit will depend on the frequency and volume of eligible purchase and sale transactions undertaken by individual schemes.

The change is primarily operational and does not directly improve a scheme's investment returns or portfolio performance. SEBI has also retained the existing treatment of Securities Transaction Tax (STT) and stamp duty, which will continue to be applicable on a delivery basis.

For mutual fund investors, the revised framework is unlikely to bring any immediate changes to the way they purchase or redeem mutual fund units. The circular does not directly alter net asset value (NAV) computation, investment objectives, redemption arrangements or the market risk exposure of schemes. Instead, the benefits will be reflected in the internal settlement operations of AMCs and custodians.

The April 1, 2027 implementation date will provide market participants with time to make the necessary operational and technological adjustments. Overall, the revised framework offers greater flexibility in mutual fund cash settlements while retaining scheme-level obligations and existing safeguards for securities delivery.

Disclaimer: The article is for informational purposes only and not investment advice.