New Delhi: Markets regulator Sebi on Wednesday proposed allowing mutual funds to use intraday borrowing lines for a wider range of cash management needs, including trade settlements, forex obligations and derivative margin payments, beyond just meeting redemption payouts.
The proposal seeks to address operational challenges faced by asset management companies (AMCs) due to timing mismatches between outflows and receivables within a scheme.
At present, intraday borrowing serves as an important cash flow management tool for mutual fund schemes and helps fund managers meet payout obligations and settlement requirements efficiently, Sebi said in the consultation paper.
The framework, initially scheduled to take effect from 1 April, was later deferred to 15 July following representations from the Association of Mutual Funds in India (Amfi) and asset management companies (AMCs) regarding operational challenges.
Mint reported in April that Amfi had made a representation to Sebi that intraday borrowing is often utilized for the purchase of securities during times of cash crunch during the day. The representation led to the deferment in implementation to July.
Sebi’s draft paper acknowledges that intraday borrowing is already widely used by fund houses as a liquidity management tool because settlement cycles across asset classes often do not align. Equity and bond purchase obligations typically require pay-ins by 10 am, while receivables from sales or TREPS deployments may arrive only later in the day.
The regulator said restricting borrowing only to redemption payouts and guaranteed receivables could impair fund management flexibility and potentially hurt scheme returns. “The fund manager’s decision-making would be impacted due to the inability to make buy and sell trades during the same day,” Sebi said in the paper.
Under the proposal, intraday borrowings may also exceed both guaranteed and non-guaranteed receivables, provided the borrowing is extinguished by the end of the day. If any portion rolls over into overnight borrowing, it must comply with existing mutual fund regulations, including the cap of 20% of scheme assets and permitted end-use conditions.
Sebi has sought public comments on the paper till 3 June.
“The paper helps remove the timing mismatch issue in purchasing securities through the trading day when sales proceeds, maturity amounts, or TREPS are to be received the same day,” said Deepak Shenoy, chief executive officer at Capitalmind Mutual Fund.
“The paper accurately represents pay-in pay-out timing differences in different asset classes, even though all are on the same day, as the key reason of intraday borrowing apart from redemptions, and certain settlement payment timing mismatches,” Shenoy added.
