The Securities and Exchange Board of India (SEBI) has approved net settlement of funds for cash-market transactions undertaken by mutual fund schemes, allowing fund houses to reduce their temporary funding requirements when they make eligible purchases and sales during the same settlement cycle. The decision, announced on November 5, 2026, is expected to improve settlement efficiency and reduce the need for mutual funds to arrange large amounts of cash when their transactions result in a smaller net payment obligation.
The framework is an important change for India’s mutual fund industry, particularly for large schemes and passive funds that regularly buy and sell securities during portfolio rebalancing. However, SEBI has maintained important safeguards: securities will continue to be settled on a gross basis, netting will be permitted only within an individual scheme, and transactions involving both purchases and sales of the same security during the same settlement cycle will not qualify for netting.
What Has SEBI Approved?
Under the new framework, mutual fund schemes can calculate their net cash obligations from eligible outright purchase and sale transactions instead of arranging funds separately for every purchase.
Previously, institutional investors such as mutual funds generally had to settle cash-market transactions on a gross basis. This meant that a scheme purchasing shares had to arrange the full payment for those purchases, even if it had sold other securities and expected to receive money from those sales during the same settlement cycle.
The new mechanism allows eligible purchase and sale obligations to be adjusted against each other at the fund scheme level.
For example, if a mutual fund scheme purchases shares worth ₹100 crore and sells eligible securities worth ₹70 crore during the same settlement cycle, it would need to arrange only the net cash difference of ₹30 crore under the proposed mechanism.
This can reduce temporary liquidity requirements without changing the delivery-based nature of securities settlement.
SEBI’s approval follows a consultation paper issued on September 3, 2026, seeking feedback from market participants on extending a similar facility to domestic mutual funds.
How Net Settlement Will Work for Mutual Funds
The framework changes the way cash obligations are calculated, but it does not allow mutual funds to avoid delivery requirements.
The distinction between cash settlement and securities settlement is central to understanding the new rules.
| Feature | Earlier gross settlement | New net funds settlement |
|---|---|---|
| Purchase obligations | Full purchase amount funded separately | Eligible purchases adjusted against eligible sales |
| Sale proceeds | Received separately | Considered when calculating net cash obligation |
| Securities delivery | Gross basis | Gross basis continues |
| Netting across schemes | Not permitted | Not permitted |
| Scheme-level accounting | Separate | Separate |
| Intra-day trading | Not permitted | Not permitted |
The new facility applies to the fund obligation rather than allowing mutual funds to net the actual securities delivered.
This means a mutual fund cannot use the framework to bypass delivery-based trading rules or conduct speculative intraday transactions.
Important Restrictions Under the New Framework
SEBI has introduced specific safeguards to ensure that net settlement does not weaken the existing institutional trading framework.
1. Netting only within individual schemes
A mutual fund house operates multiple schemes, each with separate assets and liabilities. The new framework permits netting only within the individual scheme that undertakes the transactions.
For example, a purchase obligation in one equity scheme cannot be offset against a sale obligation in another scheme managed by the same asset management company.
2. No netting of securities delivery
Only funds can be netted. Securities settlement will continue on a gross basis, preserving the requirement that purchases and sales are backed by actual delivery.
3. Same-security purchase and sale transactions excluded
Transactions involving both a purchase and a sale in the same security during the same settlement cycle will remain outside the netting mechanism and continue to be settled on a gross basis.
4. Existing institutional trading restrictions remain
The framework does not permit mutual funds to square off transactions intraday. The existing requirement for delivery-backed institutional transactions remains in place.
These restrictions are intended to prevent the new facility from becoming a route for day trading or inter-scheme transfers.
Why Does the Mutual Fund Industry Need Net Settlement?
Mutual funds regularly buy and sell securities to manage portfolios, respond to investor flows and maintain their investment strategies.
Large schemes can generate substantial purchase and sale obligations during the same settlement cycle. This is particularly relevant for index funds and exchange-traded funds (ETFs), which may need to rebalance portfolios when benchmark indices change their constituents or weightings.
Under gross settlement, a fund may have to arrange cash for purchases even when it expects to receive significant proceeds from eligible sales during the same settlement cycle.
This can create temporary liquidity pressure and increase reliance on short-term funding arrangements.
The new mechanism is expected to address several operational challenges:
- Lower funding requirements: Funds may need to arrange only their net cash obligation for eligible transactions.
- Improved liquidity management: Asset managers can use available cash more efficiently.
- Reduced short-term borrowing needs: Funds may rely less on temporary funding arrangements to meet settlement obligations.
- Better operational efficiency: Custodians and fund houses can manage eligible cash obligations more efficiently.
- Support for portfolio rebalancing: Large schemes may find it easier to manage simultaneous purchase and sale activity.
Passive Funds and ETFs Could Benefit
Passive mutual funds and ETFs are among the potential beneficiaries of the change because their portfolios are designed to track specific market indices.
When an index undergoes a rebalancing exercise, funds tracking that index may need to buy securities being added and sell securities being removed.
These transactions can create large cash requirements within a short period, even when the overall portfolio value changes very little.
For example, an index fund may sell ₹500 crore worth of securities and purchase ₹480 crore worth of other securities during the same settlement cycle. Under eligible net settlement arrangements, the scheme could arrange a net cash payment of ₹20 crore instead of separately funding the entire ₹480 crore purchase amount.
The actual securities would still have to be delivered and received under the existing gross settlement framework.
The facility could therefore improve liquidity management for funds that regularly undertake large portfolio adjustments.
SEBI Previously Extended Similar Relief to Foreign Investors
The latest decision builds on an earlier regulatory change for foreign portfolio investors (FPIs).
On April 24, 2026, SEBI permitted net settlement of funds for eligible outright cash-market transactions undertaken by FPIs.
The facility allowed qualifying purchase or sale transactions to be netted for calculating cash obligations while keeping securities settlement on a gross basis.
By extending a similar mechanism to domestic mutual fund schemes, SEBI is moving towards a more consistent settlement framework for major institutional participants in India’s equity market.
However, the mutual fund framework includes additional safeguards relating to scheme-wise accounting, segregation of assets and liabilities, and the prohibition on inter-scheme adjustments.
Implementation and Responsibilities of Market Institutions
The practical implementation of the framework will require coordination between mutual fund houses, custodians, clearing corporations and stock exchanges.
SEBI has directed the Association of Mutual Funds in India (AMFI) to develop implementation standards in consultation with relevant market participants.
These standards will be important for determining operational procedures, transaction reporting, reconciliation and the calculation of net fund obligations.
The framework will also need to preserve accurate scheme-level accounting and daily net asset value calculations. Mutual fund assets must remain ring-fenced, and the new settlement arrangement cannot be used to transfer obligations between schemes.
The regulator’s approach is therefore to improve cash efficiency without weakening existing investor-protection and settlement safeguards.
Get the day’s top stories in your inbox
One concise email. No spam, unsubscribe anytime.
