Sebi Proposes Net Cash Settlement for Mutual Funds

The Securities and Exchange Board of India (Sebi) has introduced a consultation paper proposing a shift towards net cash settlement for mutual fund schemes' stock market transactions. This initiative is designed to alleviate temporary liquidity needs and streamline the settlement process.

Under the current regulations, mutual fund trades undergo gross settlement. This necessitates arranging funds for all purchases independently, even when sales are due within the same cycle. Sebi's proposal, however, would permit net settlement for outright transactions, where a fund either buys or sells a security, but not both, within a single settlement period.

For instance, a scheme with ₹100 crore in purchases and ₹90 crore in eligible sales could settle a net amount of ₹10 crore. Crucially, this netting will not apply if a fund buys and sells the same security in the same cycle; those trades will remain on a gross basis. The securities themselves will continue to be settled delivery-based.

Furthermore, the netting is restricted to individual mutual fund schemes. Funds cannot offset obligations between different schemes. All accounting, NAV calculations, and unit-holder interests must remain unaffected. If purchase obligations exceed sale proceeds, the remaining amount must be funded according to existing borrowing rules.

Sebi anticipates this change will reduce liquidity pressure, particularly during index rebalancing and periods of significant subscription or redemption activity. This follows a similar netting allowance for Foreign Portfolio Investors (FPIs) in June. Public comments on the proposal are invited until September 24.