SEBI Proposes Net Settlement of Funds for Mutual Fund Trades in Cash Market
Mutual fund schemes could soon fund their cash-market trades the same way Foreign Portfolio Investors already do — by netting outright buy and sell obligations before arranging money for settlement, instead of funding every purchase in full regardless of same-day sale proceeds. SEBI floated this proposal in a consultation paper issued on September 3, 2026, seeking public comments by September 24, 2026.
The change, if finalised, would not touch how securities themselves are settled — that stays gross and delivery-backed. It would only change how funds are settled, aiming to ease the temporary liquidity crunch schemes face, especially around index rebalancing and large subscription or redemption days.
Quick Answer
SEBI's September 3, 2026 consultation paper proposes permitting mutual fund schemes to net their fund obligations for outright purchase or sale transactions in the cash market, while continuing to settle securities on a gross basis. The framework mirrors one SEBI already granted to Foreign Portfolio Investors on April 24, 2026. Netting would apply only at the individual scheme level, with no adjustment across schemes. This is a proposal, not a final rule — comments close on September 24, 2026, and no implementation date has yet been set.
Quick Reference
What Changed? (Proposed, Not Yet Final)
Why This Matters
Under the current framework, institutional trades in the cash market are grossed at the custodian level, and a mutual fund scheme must arrange full funds for every purchase transaction regardless of sale proceeds receivable in the same settlement cycle. SEBI's consultation paper notes that even where a scheme's net cash obligation is small, this gross-funding requirement creates temporary liquidity pressure, operational inefficiency, and reliance on short-term funding — pressure that intensifies on days involving index rebalancing or large subscriptions and redemptions.
SEBI has already addressed a version of this problem for Foreign Portfolio Investors. A circular dated April 24, 2026 permitted FPIs to net fund obligations for outright transactions in the cash market, with securities settlement staying gross, STT and stamp duty staying delivery-based, and an implementation deadline of December 31, 2026. This consultation paper proposes extending a similarly structured framework to mutual fund schemes — a step the Mutual Fund Advisory Committee (MFAC) had itself recommended during separate deliberations on intraday borrowing by mutual funds.
Who Would Be Affected?
When Would It Apply?
There is no effective date yet. The draft circular at Annexure A leaves the implementation date blank, shown as "DD/MMM/YYYY," to be filled in only after the consultation process concludes and SEBI finalises the framework. Two dates are firm at this stage:
- September 24, 2026 — deadline for public comments on the consultation paper, submitted through SEBI's online web-based comment form.
- Once implementation standards are issued, recognised Stock Exchanges and Clearing Corporations would have 30 days from that date to issue their own operational guidelines, per the draft circular.
How the Proposed Netting Would Work
The consultation paper sets out four linked proposals.
Proposal 1: Net settlement of funds for outright transactions
Net settlement of funds would be permitted for outright buy or sell transactions undertaken by a mutual fund scheme in the cash market on a recognised stock exchange. Securities with only an outright purchase or only an outright sale in a settlement cycle could be netted to arrive at the scheme's net fund obligation; securities with both a purchase and a sale in the same cycle would be excluded and continue on a gross basis. Securities settlement itself would remain gross throughout, and STT and stamp duty would continue to be levied on a delivery basis.
Proposal 2: Scheme-level netting only
Netting would be allowed only within an individual mutual fund scheme — never across different schemes of the same mutual fund or AMC. AMCs and custodians would need to ensure the framework does not disturb scheme-wise accounting, valuation, daily NAV computation, or segregation of securities and funds.
Proposal 3: Treatment of residual obligations
If outright sale value is less than outright purchase value, the residual purchase obligation — along with any purchase obligations from non-outright transactions — would still need to be funded by the scheme. If outright sale value exceeds outright purchase value, that excess could not be adjusted against non-outright purchase obligations. Any external funding used to cover a residual balance would still need to comply with existing borrowing rules for mutual funds.
Proposal 4: Operational standards
Implementation standards would be formulated by AMFI in consultation with custodians, recognised Clearing Corporations, recognised Stock Exchanges, and other stakeholders, covering treatment of partially confirmed or rejected trades, file formats and reporting, reconciliation processes, exception handling, audit trail requirements, and scheme-wise controls.
Illustration: How Netting Would Change Fund Obligations
SEBI's consultation paper includes a worked example. Assume a mutual fund scheme undertakes the following cash-market trades on a given day:
Pay-out: ₹4,000
Pay-out: ₹3,000
Here, Security A (outright purchase) and Security C (outright sale) are netted for fund settlement, while Security B — which has both a buy and a sell — stays outside the netting calculation and continues to be funded and settled gross, exactly as it is today. The scheme's overall funding requirement falls, even though the underlying securities settlement remains unchanged.
Risk Considerations and Safeguards
SEBI's paper acknowledges that netting introduces some new considerations: a possible dependence of purchase confirmation on sale confirmation, a limited increase in custodian-level settlement risk arising from timing gaps, and the need to preserve scheme-wise integrity. The proposed mitigants are that netting would be restricted to outright transactions only, the downstream settlement framework would stay unchanged, securities settlement would remain gross and delivery-based, existing borrowing provisions would continue to apply to any residual funding need, and cross-scheme or cross-portfolio adjustment of obligations would be prohibited outright.
The consultation paper is explicit that any final framework must not permit trade or delivery netting, must not dilute the delivery-backed framework, must not permit inter-scheme adjustments, and must not conflict with scheme-wise accounting, valuation, or borrowing norms under the SEBI (Mutual Funds) Regulations, 2026.
What Should Practitioners Watch?
Because this is a consultation paper and not a notified circular, there is no compliance action to take yet. AMCs, custodians, trustees, and compliance teams should instead track the process itself.
- Comment deadline: Public comments must reach SEBI by September 24, 2026, through the online web-based comment form referenced in the consultation paper; technical issues with submission can be routed by email to SEBI ([email protected] and [email protected]), with the subject line matching the consultation paper's title.
- Consultation questions worth engaging with: whether net settlement should be permitted for MF outright transactions at all; whether mixed purchase-and-sale securities should continue to be excluded from netting; whether the framework should initially be limited to cash-market transactions only; and any other suggestions with supporting rationale.
- Operational preparation that does not assume finalisation: AMCs and custodians can usefully begin mapping their systems' ability to distinguish outright from non-outright transactions at the scheme level, since this distinction sits at the core of the proposal regardless of the final implementation date.
- Governance touchpoint: the draft circular would require trustees to review implementation and confirm it serves unit-holder interest — a responsibility trustees may want to start scoping ahead of finalisation.
- Watch for the implementation timeline: the draft circular's effective date is currently blank; once fixed, exchanges and Clearing Corporations would have 30 days from the issuance of implementation standards to release their own operational guidelines.
CorpLawUpdates Analysis
The regulatory requirement here is narrow and clearly bounded: SEBI is proposing to change how mutual fund cash obligations are computed, not how securities move. Read against the April 2026 FPI precedent, this looks like an incremental extension of a mechanism SEBI has already tested with one class of institutional investor rather than a novel departure in market structure.
In practice, the more consequential parts of this proposal for compliance teams may lie in the operational safeguards rather than the netting concept itself. Requiring scheme-wise identification of six separate transaction and obligation categories, a custodian-maintained audit trail distinguishing gross, netted, and excluded obligations, and a hard prohibition on cross-scheme adjustment together suggest SEBI wants netting achieved without weakening the ring-fencing between schemes that the SEBI (Mutual Funds) Regulations, 2026 otherwise mandates. Where implementation difficulty is likely to surface is in the interaction between custodian systems and AMC trade confirmation timelines — the paper itself flags "possible dependence of purchase confirmation on sale confirmation" as a live risk, and this is exactly the kind of issue AMFI's implementation standards would need to resolve before the framework goes live.
Frequently Asked Questions
Has SEBI finalised net settlement for mutual funds?
No. This is a consultation paper issued on September 3, 2026, seeking public comments by September 24, 2026. The draft circular at Annexure A is a proposal only.
Would securities settlement also become net under this proposal?
No. Only fund settlement would be netted. Securities settlement would continue on a gross, delivery-based basis exactly as today.
What is an "outright transaction" under this proposal?
Either a purchase or a sale transaction, but not both, in a security within a settlement cycle, undertaken by a mutual fund scheme. If a scheme both buys and sells the same security in the same cycle, that security is treated as non-outright and excluded from netting.
Could one scheme net its obligations against another scheme of the same AMC?
No. The proposal explicitly restricts netting to the individual scheme level, with no netting or adjustment across different schemes of the same mutual fund or AMC.
Has SEBI done this for any other category of investor?
Yes. SEBI permitted net settlement of funds for outright transactions by Foreign Portfolio Investors under a circular dated April 24, 2026, with an implementation deadline of December 31, 2026. This proposal follows a similar structure for mutual funds.
By when must comments be submitted?
Comments must be submitted by September 24, 2026, through SEBI's online web-based comment form referenced in the consultation paper.
Would STT and stamp duty change under the proposal?
No. STT and stamp duty would continue to be levied on a delivery basis, unchanged from the current framework.
When would the framework actually take effect if approved?
Not yet known. The draft circular leaves the implementation date blank pending finalisation of the consultation process.
Source Note
Document: Consultation Paper on proposal to permit net settlement of funds for transactions undertaken by mutual fund schemes in cash market (with Draft Circular at Annexure A)
Issuing authority: Securities and Exchange Board of India (SEBI)
Date issued: September 3, 2026
Comment deadline: September 24, 2026
Contact for technical issues: [email protected], [email protected]
This article is for informational and educational purposes only and does not constitute legal or regulatory advice. The proposal discussed is a draft under public consultation and is not yet in force. Readers should verify the applicable primary regulatory source, including any final circular, before taking action.
