SEBI issues a new framework for borrowings by mutual funds

On March 13, 2026, SEBI issued a circular (SEBI Circular) to operationalise and supplement Regulation 42 of the SEBI (Mutual Funds) Regulations, 2026, on the following aspects:

• Intraday borrowings by mutual fund schemes.
• Borrowings by equity-oriented index funds and equity-oriented ETFs are used to settle under‑executed sell trades by linking such borrowings to participation in the Closing Auction Session.

Regulation 42 of the MF Regulations allows mutual funds to borrow for any of the following reasons:

• to meet temporary liquidity needs for the purpose of repurchase or redemption of units;
• payment of interest or Income Distribution cum Capital Withdrawal payout to the unitholders;
• for settlement of trades by equity-oriented index funds and equity-oriented exchange-traded funds on account of under execution of sell trades on the stock exchange.

Regulation 42 of the MF Regulations provides that total borrowings by a mutual fund shall not exceed twenty per cent of the net assets of the scheme. However, this limit shall not be applicable for intraday borrowings, which shall be subject to such conditions as may be specified by SEBI. The SEBI Circular has been issued now for this purpose and prescribes the following conditions:

• The mutual fund’s intraday borrowing policy shall be approved by the board of directors of the mutual fund’s asset management company (“AMC”) and by its board of trustees and shall be uploaded on the website of AMC.
• Intraday borrowings shall be used only for the purpose of repurchase or redemption of units or payment of interest or Income Distribution cum Capital
• The amount of intraday borrowings shall not exceed the guaranteed receivables due on the same day from the Government of India, Reserve Bank of India and Clearing Corporation of India Limited. The following is an exhaustive list of receivables that are eligible for intraday borrowings:
  • ­Maturity proceeds from TREPS
  • ­Proceeds from Reverse Repo
  • ­Maturity proceeds from G-Sec/ T-bill/ SDL/ STRIPS
  • ­Interest on G-Sec/ SDL
  • ­Sale proceeds of G-Sec/ T-bill/ SDL/ STRIPS
• The cost of intraday borrowing, if any, shall be borne by the AMC. Further, any loss or cost incurred on account of any unforeseen event or delay in receiving the funds from receivables shall also be borne by the AMC. This requirement stems from para 10.9 of the SEBI Master Circular for Mutual Funds dated June 27, 2024 (“MF Master Circular”), which states that the cost of borrowings for a given scheme shall be adjusted against the portfolio yield of the scheme and borrowing costs in excess of portfolio yield, if any, shall be borne by the AMC.
• AMCs shall ensure compliance of clauses 6 and 7 of the Fourth Schedule of SEBI (Mutual Funds) Regulations, 2026 and para 16.8 of the MF Master Circular.
  • ­Clause 6 of the Fourth Schedule of the MF Regulations provides as follows:
    • The trustees and asset management companies must avoid conflicts of interest in managing the affairs of the schemes and keep the interests of all unitholders paramount in all matters.
  • ­Clause 7 of the Fourth Schedule of the MF Regulations provides as follows:
    • The trustees and asset management companies shall ensure that the assets and liabilities of each scheme are segregated and ring-fenced from other schemes of the mutual fund; and bank accounts and securities accounts of each scheme are segregated and ring-fenced.
  • ­Para 16.8 of the MF Master Circular deals with the usage of pool accounts by mutual funds. One of the primary requirements under Para 16.8 is that internal controls are in place to segregate and ring-fence the assets and liabilities of each scheme, along with segregation and ring-fencing of securities & bank accounts.

The SEBI Circular will take effect on April 1, 2026, with respect to intraday borrowings by mutual fund schemes.

On January 16, 2026, SEBI issued a circular to introduce the Closing Auction Session in the equity cash segment of the stock exchanges, with effect from August 3, 2026. “Closing Auction Session” is a short trading window at the end of the day where prices are discovered through an auction‑like process, instead of through normal continuous buying and selling. The Closing Auction Session will not apply in the derivatives segment.

The SEBI Circular clarifies that borrowings by equity-oriented index funds and equity-oriented ETFs on account of under execution of sell trades on the Stock Exchange in terms of Regulation 42(1) of SEBI (Mutual Funds) Regulations, 2026 is permissible only for the purpose of participation by such funds in the Closing Auction Session in the equity cash segment of the Stock Exchanges with effect from August 3, 2026.

The SEBI Circular can be found here.

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Vinod Joseph, Partner – Email – vinodjoseph@elp-in.com