Summary:
SEBI has allowed mutual fund schemes to net eligible equity cash market purchase and sale transactions from April 1, 2027. The revised settlement framework aims to reduce temporary funding requirements, improve cash management and streamline settlement operations for asset management companies.
The Securities and Exchange Board of India (SEBI) has announced new settlement rules for mutual funds. It is now possible to settle eligible purchase and sale transactions in the equity cash market on a net funds basis.
The framework, unveiled on November 5, 2026, will take effect on April 1, 2027. It aims at reducing the requirement of temporary funding and improving the efficiency of settlement for mutual fund schemes.
SEBI Changes in Settlement Process What?
Under the existing settlement framework, purchase obligations of mutual fund schemes are typically fulfilled independently of the proceeds arising from the sale of securities.
This can give rise to temporary funding requirements even if the scheme is buying and selling securities in the same settlement cycle.
SEBI's amended framework allows for adjustment of eligible cash obligations in case of outright purchases and outright sales.
Netting would be at the level of a particular mutual fund scheme, subject to certain conditions:
But the regulator has not permitted all transactions to be freely adjusted.
The new arrangement is applicable to funds settlement. The actual delivery and receipt of securities shall remain on a gross basis.
How will net settlement operate?
Consider a mutual fund scheme which buys eligible securities of ₹100 crore and sells eligible securities of ₹80 crore in the same settlement cycle.
Under the new framework, the scheme can discharge a net cash obligation of Rs 20 crore instead of separately funding the entire Rs 100 crore purchase obligation.
This reduces the amount of money needed for settlement temporarily.
There are however a number of restrictions.
- Scheme-level netting: Transactions can be adjusted only between the same mutual fund scheme.
- Same settlement cycle: Purchases and sales must be within the same settlement cycle.
- Direct transactions * To qualify, purchases and sales must meet the specific definition of outright transactions.
- No funding across schemes: Cash obligations cannot be netted between schemes.
- Gross securities settlement: Delivery and receipt of securities are still separate.
If a scheme trades the same security in both a buy and a sell transaction within a single settlement cycle, such trades are not considered outright transactions and are not eligible for the new netting facility.
Excess proceeds from eligible outright sales may not be used to offset non-outright purchase obligations.
Why SEBI has relaxed the rules?
The changes tackle a real-world problem in the mutual fund industry.
Equity schemes frequently rebalance the portfolios by buying some securities and selling some.
Historically, these activities might have required separate funding arrangements, even if adequate cash was anticipated from sales in the same settlement cycle.
Net settlement lowers this temporary cash requirement.
For large schemes handling big daily transactions, the new framework may help improve cash management and ease operational pressure.
The change doesn’t boost a scheme’s investment returns directly. The main benefit is in terms of settlement efficiency, not portfolio performance.
SEBI has also kept the existing treatment for Securities Transaction Tax (STT) and stamp duty which will continue to be applicable on a delivery basis.
What this means for mutual fund investors
But it’s unlikely to change the way ordinary investors buy or sell mutual funds right away.
The circular doesn’t change the mutual fund NAV computation or investment objective, redemption arrangements or market risk exposure directly.
It will be reflected in the internal settlement operations of asset management companies and custodians instead.
The April 1, 2027 implementation date allows time to make the necessary operational changes.
The revised framework allows for more flexibility in mutual fund cash settlements while keeping separate scheme level obligations and existing securities delivery safeguards in place.
The impact would depend upon the frequency of purchase and sale transactions by mutual fund schemes that qualify.
