The Securities and Exchange Board of India (SEBI) has permitted mutual-fund schemes to net eligible fund obligations from outright cash-market trades at the level of each individual scheme. The framework, notified in a circular dated 5 November, takes effect on 1 April 2027. It changes how qualifying cash obligations are settled; securities delivery will continue on a gross basis.
What SEBI has changed
Under the new framework, a scheme may net fund obligations for eligible outright purchases and sales in the cash segment within the same settlement cycle. SEBI says the change is intended to improve operational efficiency and reduce temporary funding requirements for mutual-fund schemes.
“Outright” is narrowly defined: for a given security in a settlement cycle, the scheme must have either a purchase transaction or a sale transaction, but not both. The circular’s example shows that a scheme’s outright purchase in one security may be netted against an outright sale in another security, while a security with both buy and sell activity is excluded from netting.
Scheme-level limits and excluded trades
Netting is allowed only within the same mutual-fund scheme and the same settlement cycle.
There can be no netting or adjustment between different schemes or portfolios of the same mutual fund.
If outright sale proceeds are lower than eligible outright purchases, the scheme must fund the remaining amount.
Excess outright sale proceeds cannot be used to offset non-outright purchase obligations; those obligations continue to be funded separately on a gross basis.
Transactions involving both a purchase and a sale of the same security in one settlement cycle are ineligible. Derivatives, securities lending and borrowing, short-sale-related transactions and other transactions not expressly covered are also outside the framework.
Securities, taxes and duties remain on the existing basis
The circular permits net settlement of funds for eligible trades. It does not net the securities themselves: delivery of securities between the scheme and its custodian remains gross. Securities Transaction Tax (STT) and stamp duty continue to be charged on a delivery basis, as applicable. The delivery-backed nature of institutional cash-market trades also remains in place.
Implementation work before April 2027
Asset-management companies and custodians must put systems in place to identify scheme-wise outright and non-outright trades and track gross and net fund obligations separately. Custodians must maintain an audit trail, and trustees must review implementation for the interests of unit-holders.
AMFI will formulate implementation standards in consultation with clearing corporations, stock exchanges, custodians and other stakeholders. Those standards are expected to address reporting formats, reconciliation, settlement cut-offs, rejected or modified trades and exception handling. AMCs and custodians must jointly confirm system readiness before the framework starts.
What investors should take from the circular
This is a settlement-process change for fund schemes and market infrastructure, not a change to the way investors place mutual-fund orders. It does not guarantee lower scheme expenses, higher returns or a change in NAV. The permitted netting is limited to eligible fund obligations within one scheme and settlement cycle; the standards and operational readiness work still need to be completed before 1 April 2027.
This report explains a regulatory development and is not investment advice. Mutual-fund investments are subject to market risks; investors should review scheme documents and seek personalised advice from a SEBI-registered investment adviser when needed.
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