SEBI Relaxes Cash Market Settlement Rules for Mutual Funds, New Framework From April 2027

SEBI’s latest settlement reform will allow mutual fund schemes to offset eligible purchase and sale fund obligations within the same scheme, potentially easing short-term liquidity pressures without permitting inter-scheme funding.

The Securities and Exchange Board of India (SEBI) has introduced a significant change to cash market settlement rules for mutual funds, allowing individual schemes to net fund obligations arising from outright purchases and sales of securities.

The revised framework, scheduled to take effect on April 1, 2027, is intended to reduce temporary funding requirements and improve the efficiency of settlement operations for mutual fund schemes.

Under the new arrangement, eligible cash obligations can be offset within the same mutual fund scheme. However, securities transactions will continue to be settled on a gross basis, preserving the distinction between fund settlement and securities delivery.

The regulator has also maintained restrictions on the movement of funds between schemes, ensuring that the settlement flexibility does not become a mechanism for cross-scheme financing.

What Has SEBI Changed in Mutual Fund Settlement Rules?

The central change concerns how mutual fund schemes meet their financial obligations when buying and selling securities in the cash market.

Previously, the gross settlement approach could require schemes to arrange funds for purchase transactions even when corresponding sale proceeds were expected as part of the settlement process.

This could create temporary funding requirements, particularly for schemes executing purchases and sales during the same settlement cycle.

The revised framework permits eligible purchase and sale fund obligations to be netted at the individual scheme level.

For instance, if a mutual fund scheme has eligible purchases worth ₹100 crore and eligible sales worth ₹80 crore in the same settlement cycle, its net cash payment obligation could be ₹20 crore rather than the full ₹100 crore purchase amount.

This example is illustrative and assumes that the transactions qualify for netting under the applicable settlement rules.

The change could make it easier for fund managers to handle portfolio adjustments without arranging unnecessary short-term liquidity.

Five Important Features of SEBI’s New Settlement Framework

The revised arrangement establishes several boundaries governing how mutual fund transactions may be settled.

1. Netting Allowed Only Within Individual Schemes

A mutual fund scheme will be permitted to offset eligible fund obligations arising from outright securities purchases and sales.

The arrangement applies at the scheme level rather than across the entire asset management company.

This means that two schemes operated by the same fund house cannot combine their fund obligations to reduce the amount payable by one of them.

2. Securities Settlement Will Remain on a Gross Basis

While eligible cash obligations may be netted, securities settlement will continue on a gross basis.

In practical terms, the netting provision changes how eligible payments are calculated. It does not allow securities delivery obligations to be offset in the same manner.

This distinction is important because it preserves the separation between transferring securities and settling cash obligations.

3. Inter-Scheme Funding Remains Prohibited

SEBI has retained the prohibition on using one mutual fund scheme to fund another scheme’s settlement obligations.

For example, surplus funds arising from transactions in one equity scheme cannot be used to meet the settlement requirement of a different scheme merely because both are managed by the same asset management company.

The restriction helps maintain financial separation between schemes and protects the integrity of scheme-level fund management.

4. Separate Funding Required for Non-Outright Obligations

Another important safeguard concerns transactions outside the eligible outright purchase-and-sale category.

According to the announced framework, proceeds from outright sales must be funded separately when they relate to non-outright obligations.

This prevents the new netting permission from being interpreted as a blanket authorization to offset all types of settlement liabilities.

Fund houses will therefore need to identify eligible transactions and maintain appropriate funding arrangements for obligations that fall outside the permitted netting mechanism.

5. Implementation Begins on April 1, 2027

The revised rules are scheduled to become effective on April 1, 2027.

The period before implementation gives asset management companies and their operational partners time to review settlement procedures, internal controls and liquidity-management systems.

Successful implementation will depend on correctly identifying eligible obligations and maintaining the restrictions specified by the regulator.

Why the Settlement Reform Matters for Mutual Funds

Liquidity management is a crucial part of operating a mutual fund.

Fund managers regularly purchase and sell securities to implement investment strategies, respond to investor redemptions and rebalance portfolios.

These activities can create simultaneous payment obligations and expected cash inflows.

Even when a scheme’s overall trading activity produces a relatively small net payment requirement, gross cash settlement can increase the amount of funding needed at a particular point in the settlement process.

The new arrangement seeks to address this operational inefficiency.

By allowing eligible cash obligations to be offset, SEBI’s framework could reduce the amount of liquidity that mutual fund schemes must arrange temporarily.

For large schemes with substantial trading activity, the resulting flexibility may be operationally useful, although the actual benefit will depend on transaction volumes, trading patterns and the settlement obligations eligible for netting.

How Could Mutual Fund Investors Benefit?

The reform primarily affects the operational side of mutual fund management rather than the investment terms faced directly by individual investors.

Nevertheless, more efficient settlement procedures could offer indirect benefits.

Improved liquidity management: Schemes may be able to meet eligible settlement obligations with less temporary cash funding, potentially improving operational flexibility.

Reduced funding pressure: When qualifying purchase and sale obligations occur during the same settlement cycle, netting could reduce short-term funding needs.

More efficient portfolio execution: Fund managers may find it easier to coordinate certain buying and selling activities without maintaining the same level of temporary settlement liquidity.

Continued scheme-level safeguards: The prohibition on inter-scheme funding helps ensure that the new flexibility does not undermine the financial separation of individual schemes.

These potential advantages should not be confused with guaranteed improvements in investment returns.

The reform does not, by itself, establish higher mutual fund returns, lower expense ratios or faster redemption payments for investors.

Those outcomes depend on other factors, including portfolio performance, fund expenses and applicable redemption procedures.

What Does the Change Mean for Asset Management Companies?

For asset management companies (AMCs), the new framework introduces an opportunity to review and potentially streamline cash-market settlement operations.

Fund houses may need to adapt operational systems to distinguish qualifying outright transactions from other obligations.

They will also need controls to ensure that netting takes place only within the permitted individual scheme.

Settlement reconciliation, cash-flow monitoring and transaction classification are likely to be important implementation considerations.

The flexibility could be particularly relevant to actively managed schemes that frequently buy and sell securities, although its value will depend on the characteristics of each scheme’s trading activity.

AMCs should also ensure that operational improvements do not weaken compliance with the restrictions on inter-scheme funding.

How Is Net Settlement Different From Gross Settlement?

Understanding the difference between the two approaches helps explain the significance of SEBI’s decision.

Under gross fund settlement, the relevant payment obligations are handled without offsetting eligible purchase and sale amounts against one another.

Under net fund settlement, eligible amounts payable and receivable can be combined to determine a net cash obligation.

Consider a simplified example:

In this illustration, netting reduces the cash payment requirement for the eligible transactions from ₹150 crore to ₹30 crore.

The example assumes qualifying obligations within one scheme and the same applicable settlement cycle. Actual settlement amounts depend on transaction eligibility and applicable clearing rules.

Importantly, securities deliveries would still be handled on a gross basis.

The difference is therefore primarily about managing eligible cash obligations, not changing the securities that a mutual fund owns or must deliver.

Does the New Rule Change Mutual Fund NAV or Redemption Timelines?

The settlement reform should not be interpreted as a direct change to mutual fund net asset value (NAV) calculations or investor redemption timelines.

NAV continues to reflect the applicable valuation of a fund’s assets and liabilities, while redemption payments remain subject to the relevant rules and scheme provisions.

Although improvements in operational efficiency can support fund management, the announced netting arrangement does not itself guarantee any change in NAV publication, returns or redemption settlement periods.

Investors should distinguish between a change in institutional settlement infrastructure and a change in the terms of their mutual fund investment.

A Step Toward More Efficient Market Infrastructure

SEBI’s decision reflects an effort to improve the efficiency of mutual fund settlement while retaining restrictions designed to prevent the movement of funding obligations between schemes.

The framework balances two objectives: allowing schemes to manage eligible cash settlement requirements more efficiently and preserving safeguards around securities settlement and scheme-level financial independence.

Its practical impact will become clearer after implementation, when fund houses begin using the revised procedures.

For mutual fund investors, the immediate takeaway is straightforward: the regulation is intended to make certain back-end settlement processes more efficient, rather than change the basic nature of mutual fund investing.

With implementation scheduled for April 1, 2027, asset management companies will need to prepare their operational systems while ensuring that eligible netting remains confined to individual schemes.

Editorial note: This article is for informational purposes and does not constitute investment advice.