SEBI Expands Intraday Borrowing Rules For Mutual Funds from Sep-2026

Quick Summary

• SEBI issued Circular No. HO/(92)2026-IMD-POD-2/I/16006/2026 dated July 10, 2026, expanding intraday borrowing purposes for mutual funds.
• The facility now covers unitholder pay-outs, investment pay-ins, MTM obligations, forex settlements, and repayment of existing borrowings.
• Borrowing quantum is tied to guaranteed receivables from RBI, CCIL, and subscription inflows, plus sighted non-guaranteed receivables from NCDs, CPs, CDs, and OTC swaps.
• Additional intraday borrowing over and above receivables is permitted solely for meeting redemption and unitholder pay-outs under Regulation 42(1) of SEBI (Mutual Funds) Regulations, 2026.
• All intraday borrowings must be repaid by end of day; any conversion to overnight borrowing must stay within the 20% of net assets limit under Regulation 42(1) of SEBI (Mutual Funds) Regulations, 2026.
• The cost of intraday borrowing and any loss from delayed receivables shall be borne entirely by the AMC.
• The circular supersedes earlier guidelines and comes into effect from September 1, 2026.

What exactly has SEBI changed in the intraday borrowing rules for mutual funds?

Earlier, the March 13, 2026 circular (Circular No. HO/(92)2026-IMD-POD-2/I/6961/2026) permitted intraday borrowing only for repurchase or redemption of units and payment of interest or Income Distribution cum Capital Withdrawal to unitholders. The quantum was restricted to guaranteed receivables from the Government of India, RBI, CCIL, TREPS, reverse repo, and G-Sec/T-bill/SDL/STRIPS proceeds.

Now, the July 10, 2026 circular broadens the purposes under clause 2.1 to include pay-in obligations for investments made by the scheme, MTM obligations on derivative positions, foreign exchange settlements, and repayment of existing borrowings. This expansion addresses the operational reality that mutual funds face timing mismatches across multiple settlement cycles within a single day, not just redemption payouts.

The borrowing quantum under clause 2.2 now includes both guaranteed receivables and non-guaranteed receivables sighted during the day, such as maturity proceeds and secondary market settlement from NCDs, CPs, CDs, and OTC swaps. Clause 2.2.3 further permits additional intraday borrowing beyond these receivables, but solely for meeting redemption and unitholder pay-outs as specified under Regulation 42(1) of SEBI (Mutual Funds) Regulations, 2026.

Why did SEBI expand the intraday borrowing facility beyond redemption payouts?

The expansion follows representations from the Association of Mutual Funds in India highlighting that intraday timing mismatches arise across equity, debt, and hybrid schemes from settlement timing differences, forex obligations, derivative mark-to-market payments, and trade settlements. The earlier narrow framework forced AMCs to manage multiple liquidity gaps through ad-hoc arrangements.

The regulatory foundation was laid by the SEBI (Mutual Funds) (Amendment) Regulations, 2026, notified via Gazette Notification No. SEBI/LAD-NRO/GN/2026/307 dated July 3, 2026. This substituted Regulation 42(2) to clarify that the 20% borrowing limit under Regulation 42(1) does not apply to intraday borrowings, subject to conditions specified by the Board. The July 10, 2026 circular operationalises this carve-out with detailed safeguards.

SEBI’s objective is to formalise intraday borrowing as a cash flow management tool while ensuring it is not used as a source of leverage. The requirement that AMCs bear all borrowing costs and losses from unforeseen events ensures that unitholders are not exposed to the risks of intraday funding operations.

What safeguards must AMCs comply with when using the expanded intraday borrowing facility?

Under clause 2.3 of Circular No. HO/(92)2026-IMD-POD-2/I/16006/2026 dated July 10, 2026, AMCs bear full responsibility for ensuring intraday borrowings are repaid by end of day. If any portion spills into overnight borrowing, it must comply with the 20% of net assets limit and six-month duration cap under Regulation 42(1) of SEBI (Mutual Funds) Regulations, 2026, and must be for permitted purposes only.

Clause 2.4 mandates that both the Board of the AMC and the Board of Trustees must approve a formal intraday borrowing policy. This policy, which must be published on the AMC website, must detail approval processes, monitoring mechanisms, and escalation protocols. Clause 2.5 requires scheme-wise records documenting the underlying liquidity mismatch and the expected source of repayment for each intraday borrowing instance.

Crucially, clause 2.7 places the entire cost burden on the AMC. The interest or charge on intraday borrowings, and any loss arising from unforeseen events or delays in receiving receivables under clauses 2.2.1 and 2.2.2, cannot be charged to the scheme. This ensures unitholders are not exposed to the cost of bridging timing mismatches.

How does the March 2026 framework compare with the September 2026 expansion?

How does the expanded facility work in practice? A worked example

Consider a debt mutual fund scheme with a previous day AUM of ₹500 crore. On a given morning, the scheme faces redemption pay-outs of ₹40 crore that must be dispatched to investors. The scheme has guaranteed receivables of ₹25 crore from TREPS maturity and G-Sec coupon proceeds to be received by evening. Additionally, the fund manager has sighted non-guaranteed receivables of ₹10 crore from NCD secondary market settlement expected by end of day.

Under the July 10, 2026 circular, the AMC can avail intraday borrowing of up to ₹35 crore (₹25 crore guaranteed plus ₹10 crore sighted non-guaranteed receivables). Since redemption pay-outs of ₹40 crore exceed this amount, the AMC can avail an additional ₹5 crore solely for meeting unitholder pay-outs under clause 2.2.3 read with Regulation 42(1) of SEBI (Mutual Funds) Regulations, 2026. The total intraday borrowing of ₹40 crore is fully covered by the combined receivable pool of ₹35 crore plus the unitholder pay-out carve-out.

The AMC must ensure the entire ₹40 crore is repaid by end of day from the ₹35 crore receivables and other scheme cash flows. If for any reason ₹10 crore remains unpaid by evening, it converts to overnight borrowing, which at ₹10 crore is well within the 20% of net assets limit (₹100 crore ceiling) under Regulation 42(1) of SEBI (Mutual Funds) Regulations, 2026. The interest cost on the ₹40 crore intraday borrowing for a few hours is borne entirely by the AMC, not the scheme.

What should the AMC’s intraday borrowing policy contain to meet SEBI’s approval requirements?

Under clause 2.4 of Circular No. HO/(92)2026-IMD-POD-2/I/16006/2026 dated July 10, 2026, both the Board of the Asset Management Company and the Board of Trustees of the mutual fund must independently approve the intraday borrowing policy before the facility is operationalised. This dual approval requirement ensures that the interests of unitholders are safeguarded by the trustees while the AMC’s board oversees the operational framework.

The policy must be published on the AMC’s website, making it accessible to investors and regulators. Clause 2.4 mandates that the policy shall, inter-alia, include approval processes and monitoring mechanisms. In practice, this means the policy should clearly specify who within the AMC is authorised to initiate intraday borrowing, the escalation hierarchy for amounts exceeding sighted receivables, the real-time tracking systems for receivable inflows, and the end-of-day reconciliation protocol to confirm full repayment.

The July 10, 2026 circular supersedes the earlier framework under clause 5.9.1 of the SEBI Master Circular for Mutual Funds dated March 20, 2026, and Circular No. HO/(92)2026-IMD-POD-2/I/7885/2026 dated March 25, 2026. AMCs that had initiated policy drafting under the March framework must now align their documentation with the expanded purposes and revised quantum limits under the new circular before the September 1, 2026 effective date.

How must AMCs document and monitor intraday borrowings on a scheme-wise basis?

Clause 2.5 of Circular No. HO/(92)2026-IMD-POD-2/I/16006/2026 dated July 10, 2026 requires AMCs to maintain scheme-wise records that detail the underlying liquidity mismatch and the expected source of repayment for every instance of intraday borrowing. This record-keeping obligation is critical because the expanded facility now covers multiple purposes, including investment pay-ins, MTM obligations, and forex settlements, each with different receivable timelines and counterparty risks.

For each scheme, the records should capture the nature of the timing mismatch being addressed, whether the borrowing is backed by guaranteed receivables under clause 2.2.1, sighted non-guaranteed receivables under clause 2.2.2, or the additional carve-out for unitholder pay-outs under clause 2.2.3. The expected source of repayment must be specifically identified, such as TREPS maturity proceeds, NCD secondary market settlement, or subscription inflows, with the anticipated time of receipt documented.

Clause 2.6 further requires AMCs to ensure compliance with clauses 6 and 7 of the Fourth Schedule of SEBI (Mutual Funds) Regulations, 2026, and para 17.7 of the SEBI Master Circular for Mutual Funds dated March 20, 2026. These provisions govern the valuation and accounting treatment of borrowings and the disclosure obligations in the scheme financial statements. AMCs should integrate their intraday borrowing records with existing liquidity risk management frameworks to enable trustees and auditors to verify that no intraday borrowing has been used as a disguised source of leverage.

What happens when intraday borrowing converts to overnight borrowing?

Clause 2.3 of Circular No. HO/(92)2026-IMD-POD-2/I/16006/2026 dated July 10, 2026 places the onus squarely on AMCs to ensure intraday borrowings are extinguished by end of day. However, if receivables are delayed or market disruption prevents repayment, the borrowing spills into overnight. At that point, the carve-out under Regulation 42(2) of SEBI (Mutual Funds) Regulations, 2026 ceases to apply, and the full weight of Regulation 42(1) is triggered.

The overnight borrowing must then comply with three hard constraints: it cannot exceed 20% of the net assets of the scheme, the duration cannot exceed six months, and the purpose must fall within the narrow list under Regulation 42(1) — repurchase, redemption, interest, IDCW payouts, or trade settlement for equity-oriented index funds and ETFs. Any intraday borrowing originally availed for investment pay-ins, MTM obligations, or forex settlements that remains unpaid by end of day would not qualify as a permitted overnight purpose, creating a regulatory breach.

How does the expanded facility work for equity-oriented index funds and ETFs?

Equity-oriented index funds and ETFs operate with minimal cash buffers to minimise tracking difference and tracking error. Under Regulation 42(1) of SEBI (Mutual Funds) Regulations, 2026, these schemes can already borrow for settlement of trades on account of under-execution of sell trades on the stock exchange. The July 10, 2026 circular expands this umbrella to include MTM obligations on derivative positions and foreign exchange settlements, which is particularly relevant for schemes with international exposure or futures hedging.

Consider an equity-oriented index fund with a previous day AUM of ₹300 crore. On a given day, the fund participates in the Closing Auction Session and faces under-execution of sell trades, creating a net cash shortfall of ₹20 crore. The fund also has MTM obligations of ₹8 crore on derivative positions. Under clause 2.1 of Circular No. HO/(92)2026-IMD-POD-2/I/16006/2026, the AMC can avail intraday borrowing of ₹28 crore to cover both obligations. If the fund has guaranteed receivables of ₹15 crore from CCIL, the borrowing is within the receivable cover. However, if the full amount is not repaid by end of day, the overnight borrowing of ₹28 crore must not exceed 20% of ₹300 crore (₹60 crore), and must be for the permitted purpose of trade settlement under Regulation 42(1).

The critical distinction is that the additional intraday borrowing beyond receivables under clause 2.2.3 is available solely for unitholder pay-outs. For trade settlement shortfalls arising from Closing Auction Session under-execution, the borrowing must be covered by receivables or the scheme’s own cash. AMCs cannot use the clause 2.2.3 carve-out to fund trade settlement gaps beyond receivable cover, making liquidity forecasting essential for index fund managers.

What Should You Do Next?

1. Review your existing intraday borrowing policy and align it with the expanded purposes under Circular No. HO/(92)2026-IMD-POD-2/I/16006/2026 dated July 10, 2026, before the September 1, 2026 effective date.
2. Obtain fresh approval from both the AMC Board and the Board of Trustees for the updated policy, as mandated under clause 2.4 of the circular.
3. Publish the approved intraday borrowing policy on the AMC website to ensure transparency and regulatory compliance.
4. Establish a robust record-keeping framework to capture scheme-wise liquidity mismatches and expected repayment sources for every intraday borrowing instance, as required under clause 2.5.
5. Set up real-time monitoring mechanisms to track guaranteed and non-guaranteed receivables throughout the day and ensure all intraday borrowings are extinguished by end of day.
6. Train treasury, operations, and compliance teams on the expanded permissible purposes, including investment pay-ins, MTM obligations, forex settlements, and repayment of existing borrowings.
7. Review existing overnight borrowing positions to ensure that any intraday borrowing that converts to overnight borrowing stays within the 20% of net assets limit under Regulation 42(1) of SEBI (Mutual Funds) Regulations, 2026.

Common Pitfalls to Avoid in Intraday Borrowing

Based on regulatory scrutiny, here are the compliance mistakes AMCs often make when managing intraday liquidity:

• Using Unitholder Pay-Out Carve-Outs for Trade Settlements: Clause 2.2.3 strictly permits borrowing above receivable limits only for redemption and IDCW payouts. Using this excess allowance to fund trade pay-ins is a direct violation of the circular.
• Passing Borrowing Costs to the Scheme: Clause 2.7 explicitly requires the AMC to bear all interest costs and delayed receivable losses. Erroneously accounting for these costs under the scheme’s Total Expense Ratio (TER) will trigger immediate SEBI penal action.
• Failing the Overnight Conversion Test: When an intraday borrowing spills over to the next day due to delayed receivables, it is suddenly bound by the strict Regulation 42(1) limit (20% of net assets). AMCs that do not maintain sufficient headroom within that 20% limit risk an immediate overnight compliance breach.

Frequently Asked Questions

Sources

• TaxGuru — SEBI Permits Intraday Borrowing Facility for Mutual Funds from 1st September 2026
• SEBI — Borrowing by Mutual Funds (Circular No. HO/(92)2026-IMD-POD-2/I/6961/2026)
• TaxGuru — SEBI Permits Mutual Funds to Undertake Intraday Borrowing for Timing Mismatches
• TaxGuru — SEBI Approves Major Regulatory Reforms to Simplify Securities Market Processes
• TaxGuru — SEBI Allows Intraday Borrowing by Mutual Funds to Manage Redemption Timing Mismatch
• SEBI — Consultation Paper on utilization of intraday borrowing lines by Mutual Funds
• TaxGuru — SEBI Proposes Wider Use of Intraday Borrowing Facilities by Mutual Funds
• SEBI — Board Meeting Memorandum on SEBI (Mutual Funds) Regulations, 2026

Action for Investors and Advisors: Check your AMC’s website for the published intraday borrowing policy, which clause 2.4 mandates must be publicly available. Understanding this policy helps assess how your fund manager handles settlement timing risks without charging costs to the scheme.