SEBI Introduces New Net Settlement Framework for Mutual Fund Schemes

SEBI will allow mutual fund schemes to net fund obligations from purchase and sale transactions starting April 1, 2027, to boost efficiency. This new framework excludes derivatives and requires systems for audit trails and compliance.

SEBI's New Settlement Framework

Mutual fund schemes will be allowed to net fund obligations arising from outright purchase and sale transactions in the cash market from April 1, 2027, under a new framework introduced by the Securities and Exchange Board of India (SEBI) to reduce temporary funding requirements and improve settlement efficiency.

In a circular issued on Thursday, the market regulator said the facility would be available at the level of individual mutual fund schemes, while settlement of securities would continue on a gross basis. The move is aimed at enhancing operational efficiency for mutual funds by allowing eligible purchase and sale obligations to be adjusted against each other for fund settlement within the same settlement cycle.

Defining Transactions and Settlement Rules

SEBI defined an outright transaction as either a purchase or a sale of a security, but not both, by a mutual fund scheme during the same settlement cycle. Where a scheme undertakes both purchase and sale transactions in the same security within that cycle, those transactions will be treated as non-outright and excluded from the net settlement facility.

The regulator clarified that netting would be permitted only within the same mutual fund scheme and settlement cycle. No adjustment of obligations or funding would be allowed across different schemes of the same mutual fund.

Funding Obligations and Restrictions

The framework also specifies that if the value of outright sale transactions is lower than outright purchases, the concerned scheme will have to fund the residual obligation. If outright sale proceeds exceed purchase obligations, the excess cannot be adjusted against non-outright purchase obligations, which will continue to be funded separately on a gross basis.

SEBI said the new arrangement would not change the delivery-backed nature of institutional trades. Securities settlement will continue on a gross basis, while Securities Transaction Tax and stamp duty will remain applicable on a delivery basis. The framework will not cover derivatives, securities lending and borrowing transactions, short-sale-related transactions or other transactions not expressly specified in the circular.

Operational Compliance

Asset management companies and custodians will be required to establish systems to identify eligible and excluded transactions and maintain an audit trail of gross and net fund obligations. Trustees will also review implementation to ensure that the arrangement remains in the interest of unit-holders. The Association of Mutual Funds in India (AMFI) will formulate implementation standards in consultation with exchanges, clearing corporations, custodians and other stakeholders.

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