SEBI reforms 2026: Net FPI fund settlement, MF borrows

Why SEBI’s latest settlement changes matter

India’s market regulator is working on two separate, operations-focused reforms that affect how money moves through the market. One is a consultation proposal to ease how mutual funds can use intraday borrowing from banks for day-to-day cash management. The other is a formal framework that allows foreign portfolio investors (FPIs) to net their fund obligations for certain cash market trades, replacing a more funding-intensive gross settlement approach.

Both changes are positioned as measures to reduce friction in settlement and cash handling while keeping key risk controls intact. For mutual funds, SEBI’s focus is on allowing more permissible end-uses for intraday borrowing, after asset managers raised practical difficulties with the tighter regime introduced earlier in the year. For FPIs, the regulator has issued a detailed circular setting out where netting is allowed, where it is not, and the operational deadlines.

Mutual funds: what SEBI is proposing on intraday borrowing

In a consultation paper issued on Wednesday, SEBI proposed allowing mutual funds to use intraday borrowing from banks not only for redemption payouts but also for a wider set of needs. The additional permitted uses include trade settlements, forex obligations, mark-to-market (MTM) requirements of derivative positions, and other cash management purposes.

The consultation comes weeks after asset managers flagged operational hurdles in complying with the tighter intraday borrowing framework rolled out earlier this year. The proposed changes indicate SEBI is considering a broader definition of legitimate, same-day liquidity needs for schemes that must meet settlement and margin-related obligations within the trading day.

SEBI has sought public comments on the consultation paper till 3 June.

How the proposed intraday borrowing flexibility would work

A key element in the consultation is the treatment of receivables and the intraday nature of the borrowing. Under SEBI’s proposal, intraday borrowings may exceed both guaranteed and non-guaranteed receivables, as long as the borrowing is extinguished by the end of the day.

This is a meaningful operational point because real-world settlement and cash flows can be uneven even when receivables exist, especially when schemes face multiple obligations such as settlement pay-ins, derivative MTM, or forex-related payments. The proposal keeps the emphasis on intraday discipline by requiring that the borrowing not persist beyond the day.

What happens if intraday borrowing becomes overnight borrowing

SEBI’s proposal also clarifies the regulatory treatment if an intraday borrowing is not fully repaid by day-end. If any portion rolls over into overnight borrowing, it must comply with existing mutual fund regulations.

Those existing regulations include a cap of 20% of scheme assets and permitted end-use conditions. In other words, while SEBI is considering more flexibility for intraday needs, it is not proposing to dilute the constraints that apply once borrowing becomes an overnight exposure.

This distinction aims to preserve risk controls around leverage and longer-duration funding, while acknowledging that short-duration liquidity mismatches can arise during the day.

FPIs: SEBI’s formal circular on net settlement of funds

Separately, following a consultation process initiated earlier this year, SEBI has issued a formal circular (HO/(1)2026-AFD-POD2/I/10157/2026) on net settlement of funds for outright transactions undertaken by FPIs.

The stated objective of the framework is to improve operational efficiency and reduce funding costs. It allows eligible FPIs to settle a single net payable or receivable for certain cash market transactions, instead of funding purchases on a gross basis even when there are same-day sale proceeds available.

What “outright transactions” mean under the FPI framework

Netting is now permitted for “outright” buy or sell transactions. As defined in the framework, an outright transaction is one where the FPI has either only a purchase or only a sale in a security during a settlement cycle, but not both.

Eligible for netting are securities with only buy transactions and securities with only sell transactions in that cycle. These will be netted to determine the net fund obligation.

Non-outright trades, where both purchase and sale occur in the same security within the same settlement cycle, will continue to be settled on a gross basis. SEBI’s documents also clarify that netting of intraday transactions in the same security is excluded.

Key guardrails: securities settle gross, statutory charges unchanged

A critical design choice in the framework is that only the fund leg is being netted. Settlement of securities remains on a gross basis between FPIs and custodians. This is intended to preserve the existing delivery and settlement controls while easing funding mechanics.

SEBI also clarified that Securities Transaction Tax (STT) and stamp duty will continue on a delivery basis. So, while the fund payment obligations may be netted for eligible transactions, statutory charges and securities delivery processes remain unchanged.

How the net obligation is determined and what is not allowed

The framework sets boundaries on how netting can be used within a settlement cycle:

• If outright sale value is lower than outright purchase value, the FPI must fund the balance after netting.
• If outright sale value is higher than outright purchase value, excess sale proceeds cannot be adjusted against non-outright purchase obligations.

This ensures that netting is limited to the defined subset of outright transactions and does not become a mechanism to offset funding for trades that remain under gross settlement.

Implementation timeline and the role of CDSSF

SEBI has tasked the Custodians and DDPs Standards Setting Forum (CDSSF) with defining granular standard operating procedures (SOPs) for the new net settlement framework. The expectation is that implementation standards will be developed after consulting relevant stakeholders.

All stakeholders are required to operationalize these changes on or before December 31, 2026. SEBI’s communications emphasise that the timeline is linked to system and process modifications needed across custodians, designated depository participants (DDPs), and related market infrastructure.

Quick summary of what SEBI has put on the table

Market impact: operational efficiency without changing core safeguards

The mutual fund proposal, if implemented, would widen the set of legitimate intraday liquidity tools for schemes that manage settlement and derivative-related cash flows within the day. At the same time, SEBI’s condition that the borrowing be extinguished by day-end, and that any rollover must comply with the 20% cap and end-use limits, keeps the leverage-related guardrails unchanged for longer exposures.

For FPIs, fund netting for outright cash market transactions targets a specific pain point: temporary funding needs when an investor has both purchases and sales in different securities during a settlement cycle. By allowing a single net fund obligation, the framework is designed to reduce funding pressure while keeping securities delivery on a gross basis and maintaining statutory charges as before.

Conclusion

SEBI’s two-track push focuses on settlement practicality: easing mutual fund intraday cash management within defined limits, and formalising a fund-netting mechanism for FPIs limited to outright cash market transactions. The mutual fund changes are currently at the consultation stage with comments sought till 3 June, while the FPI netting framework is backed by a formal circular and must be operationalised on or before December 31, 2026.