SEBI Defers New Intraday Borrowing Guidelines For Mutual Funds To July 15

The Securities Exchange Board of India (SEBI) on Wednesday, May 13, proposed to allow mutual funds to use intra-day borrowings for purposes beyond investor redemptions, and payouts, while also deferring the implementation of guidelines on such borrowings to July 15.

The market regulator plans to also increase the scope of intraday borrowing facilities positioning them as a border cash management tool for mutual funds.

Earlier, intraday ​borrowing was permitted to aid ​asset managers bridge mismatches between redemption payouts and receivables due on the same date.

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The regulator is now considering allowing ​intraday borrowing for a wider set of uses, including meeting ‌trade ⁠settlement obligations, forex transactions, derivative margin requirements, and other liquidity needs

SEBI also proposes to remove restrictions linking intraday borrowings to guaranteed receivables such as inflows ​from the ​government or ⁠clearing corporations

Mutual funds could also temporarily borrow amounts exceeding expected inflows, provided these ​are repaid by the end of the ​day according to SEBI, citing a Reuters report.

Any borrowing that spills over into overnight positions would be subject to existing regulatory caps, including a ⁠limit ​of 20% of a mutual ​fund scheme's net assets and a maximum tenure of six months. 

SEBI's New Proposal: Why Now?

While mutual funds make payments in the morning for purchasing stocks, bonds, or paying investors who redeem units, they receive money from selling investments a day later.

Due to this timing issue, funds sometimes do not have enough cash at the right time during the day, even though they will receive the money later.

To resolve this, mutual funds take short-term loans from banks in the day. This is called intraday borrowing. It is used only for a few hours and is fully repaid by the end of the same day using incoming money.

Meanwhile, the market watchdog noted that the proposal could aid mutual funds manage their daily cash needs more efficiently by reducing the need to sell investments too quickly, allowing smoother execution of buy and sell trades.