The Securities and Exchange Board of India (SEBI) is considering allowing mutual fund schemes to settle equity-market trades on a net basis, a move that could reduce liquidity pressures for asset management companies (AMCs) and lower their reliance on intraday borrowing. The proposal follows requests from the mutual fund industry for a settlement framework similar to the one SEBI introduced for foreign portfolio investors (FPIs) in April 2026.
SEBI Chairman Tuhin Kanta Pandey said the regulator is examining the proposal at the Association of Mutual Funds in India (AMFI) annual general meeting. Under a net-settlement mechanism, multiple buy and sell obligations can be offset against one another, leaving the fund to arrange cash only for the net amount payable rather than separately funding every purchase. For AMCs managing large portfolios and frequent flows, the change could improve cash efficiency and reduce funding requirements during the settlement cycle.
SEBI Weighs Net Settlement For Mutual Fund Trades
The proposed framework is aimed at the operational cash-management pressures that mutual funds can face when several equity transactions occur around the same time. Under the existing gross-settlement approach, individual purchase and sale obligations have to be funded separately even when a fund has offsetting transactions.
Net settlement would allow eligible obligations to be aggregated before the final cash movement. In practical terms, a mutual fund that buys shares worth ₹100 crore and sells shares worth ₹80 crore would need to arrange only the ₹20-crore net cash requirement, subject to the final rules and settlement arrangements.
Gross Settlement Vs Net Settlement
| Settlement Method | How It Works | Cash Requirement |
|---|---|---|
| Gross settlement | Buy and sell obligations are settled separately | Higher |
| Net settlement | Offsettable obligations are combined | Lower |
| Main benefit | Less cash tied up during settlement | Better liquidity efficiency |
| Main objective | Reduce temporary funding pressure | Lower intraday cash needs |
| Proposed MF status | Under consideration by SEBI | Not yet implemented |
The proposal does not mean mutual funds would receive additional investment capacity or be permitted to take greater market risk. Its primary purpose would be to make the movement of settlement funds more efficient.
Why Mutual Funds Want Net Settlement
AMCs have sought a framework that can reduce the amount of cash they need to arrange during the trading and settlement process. The issue becomes more significant when schemes execute large numbers of purchases and sales simultaneously.
For example, a fund may receive redemption-related cash requirements while also selling securities, purchasing replacement securities, rebalancing its portfolio or adjusting exposure because of index changes. If these transactions are settled separately, the fund may temporarily require more liquidity even when its overall position is substantially balanced.
Netting can reduce this mismatch.
Simple Example Of The Proposed Mechanism
CURRENT GROSS SETTLEMENT
Buy transactions ₹100 crore
Sell transactions ₹80 crore
──────────
Separate cash flows ₹180 crore
↓
PROPOSED NET SETTLEMENT
Buy obligations ₹100 crore
Less: Sell proceeds ₹80 crore
──────────
Net cash requirement ₹20 crore
Potential benefit: lower temporary liquidity requirement
This is an illustrative example of the mechanics and does not represent a proposed SEBI threshold or a guaranteed reduction in funding requirements.
SEBI Already Allows Net Settlement For FPIs
The mutual fund proposal follows a similar facility introduced for foreign portfolio investors. SEBI issued its framework for net settlement of funds for FPI transactions in the cash market on April 24, 2026. The regulator’s move followed representations from FPIs and custodians that gross settlement could create liquidity pressures and higher funding costs.
SEBI’s April framework allows FPIs to settle their fund obligations with custodians arising from outright purchases and sales in the equity cash market on a net basis. The regulator’s stated approach was designed to improve operational efficiency and reduce funding requirements while maintaining safeguards around settlement risk.
SEBI’s Settlement Reform Timeline
| Date | Development |
|---|---|
| April 24, 2026 | SEBI issued framework for net settlement of FPI cash-market transactions |
| May 2026 | Mutual fund-related regulatory consultations continued |
| August 21, 2026 | SEBI chairman said net settlement for mutual funds was under consideration |
| Current status | Proposal under examination; no final MF framework announced |
The move toward mutual fund netting therefore represents a potential expansion of an approach already being used for another major category of institutional investors.
How Net Settlement Could Help AMCs
The most direct benefit would be improved cash management. Mutual funds could potentially reduce the amount of temporary funding required to bridge the gap between securities purchases and sales.
SEBI has already taken steps to provide mutual funds with greater flexibility around short-term liquidity management. In March 2026, the regulator allowed intraday borrowing by mutual funds to manage temporary cash mismatches while processing investor redemptions and other permitted requirements. The broader borrowing framework generally allows mutual funds to borrow up to 20% of a scheme’s net assets for specified purposes, subject to applicable conditions, while the 20% limit does not apply to qualifying intraday borrowing.
The possible introduction of net settlement could complement that measure by reducing the underlying cash mismatch in the first place.
Potential Benefits For Mutual Funds
| Potential Benefit | Impact On AMCs |
|---|---|
| Lower temporary cash requirement | More efficient liquidity management |
| Reduced intraday borrowing | Potentially lower financing costs |
| Better use of sale proceeds | Faster offset against purchases |
| Fewer gross cash movements | Greater operational efficiency |
| Easier portfolio rebalancing | Reduced settlement-related pressure |
| Improved cash forecasting | More efficient treasury management |
The exact financial benefit will depend on the final eligibility criteria, settlement architecture, custodial arrangements and safeguards SEBI ultimately adopts.
Mutual Fund Industry Has Grown More Complex
The regulatory review comes as India’s mutual fund industry has become substantially larger and more operationally complex. AMCs manage multiple schemes with different investment mandates, liquidity profiles and transaction patterns.
Large equity funds may simultaneously deal with subscriptions, redemptions, portfolio rebalancing, corporate actions and benchmark-related transactions. These activities can generate significant gross cash movements even when the overall net cash position is relatively small.
The proposed mechanism could therefore be particularly relevant to large AMCs and schemes with high trading volumes, although SEBI has not yet specified which schemes or transactions would qualify.
SEBI Also Reviewing AMC Activities And Distributor Rules
The net-settlement proposal is part of a broader review of the mutual fund regulatory framework. Pandey also said SEBI is examining the activities that AMCs should be permitted to undertake.
Separately, a working group is reviewing the regulatory framework governing mutual fund distributors with the aim of harmonizing areas of overlap between distributors and investment advisers.
These reviews reflect the increasing scale and complexity of the asset-management industry and the need for regulation to evolve alongside it.
Governance Remains A Key Focus
While discussing the proposed reforms, SEBI has emphasized that operational flexibility should not weaken the fiduciary obligations of AMCs. The regulator has stressed that fiduciary responsibility needs to extend across the investment process, valuation, distribution, disclosures and investor servicing.
SEBI has also emphasized the role of mutual fund trustees in independently supervising schemes and protecting unitholder interests.
This means any net-settlement framework is likely to be accompanied by controls designed to prevent liquidity-management flexibility from creating additional settlement or investor-protection risks.
What Could Change For Mutual Fund Investors?
For retail investors, the proposal would primarily affect the back-end operations of mutual funds rather than directly changing how investors purchase or redeem units.
If net settlement lowers temporary funding requirements and improves operational efficiency, AMCs could potentially manage portfolios more efficiently. However, investors should not interpret the proposal as an indication that mutual funds will automatically deliver higher returns or lower expense ratios.
The immediate impact would be on the fund’s treasury and settlement processes.
POTENTIAL FLOW
Investor Flows
↓
Mutual Fund Scheme
↓
Portfolio Purchases + Sales
↓
Gross Cash Obligations
↓
NETTING
↓
Lower Net Settlement Requirement
↓
Potentially Better Cash Efficiency
The final benefits will depend on the structure SEBI adopts and how custodians, clearing corporations and AMCs implement the system.
Risks And Implementation Challenges
Net settlement can reduce liquidity requirements, but it also changes the way settlement obligations are managed. The system must ensure that offsetting transactions are accurately identified and that the net obligation is funded on time.
Operational controls will therefore be important. Custodians and AMCs would need systems capable of accurately calculating net obligations across eligible transactions while maintaining clear segregation between schemes and ensuring that one scheme’s cash position cannot improperly support another.
Settlement risk also needs to remain controlled. SEBI’s experience with the FPI framework shows that implementation requires attention to funding arrangements, operational processes and stress scenarios. In its FPI consultation, the regulator considered concerns around settlement infrastructure, defaults and operational risk while moving toward implementation.
The Bigger Picture
SEBI’s consideration of net settlement for mutual funds represents another step toward improving the efficiency of India’s institutional investment infrastructure. The proposal would allow mutual funds to potentially offset purchase and sale obligations, reducing the amount of cash that has to move during the settlement cycle and potentially limiting the need for temporary borrowing.
The move also fits into SEBI’s wider push to reduce operational friction across Indian capital markets. Recent reforms have addressed FPI settlement, mutual fund borrowing, stock lending, short selling and other market-access mechanisms. Reuters reported that SEBI is also considering broader trading reforms aimed at improving market accessibility and attracting institutional capital, including changes to collateral requirements and stock lending.
Looking Ahead
The next important step will be for SEBI to determine the scope and safeguards of any mutual fund net-settlement framework. The regulator has not yet announced a final framework, so questions around eligible transactions, scheme-level netting, custodian responsibilities, settlement timelines and risk controls remain open. If adopted, the system could give AMCs another tool to manage temporary liquidity mismatches more efficiently.
For the mutual fund industry, the proposal could become increasingly valuable as assets, transaction volumes and portfolio complexity continue to rise. The key will be balancing operational efficiency with investor protection and settlement discipline. A well-designed framework could reduce unnecessary cash-management friction without changing the fundamental fiduciary responsibilities of AMCs and trustees.
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