Sebi sets new conditions for intraday borrowing by mutual funds from April 1

In a bid to enhance liquidity management within mutual funds, the Securities and Exchange Board of India (Sebi) has announced new conditions for intraday borrowing, set to take effect from April 1. This measure aims to address temporary cash flow mismatches that occur between the timing of redemption payouts and incoming investments. Traditionally, mutual funds have faced challenges because redemption payments are processed in the morning, while funds from transactions like TREPS and reverse repos arrive later in the day. The new rules formally recognize the necessity of short-term borrowing to bridge this gap, while instituting safeguards for investor protection. Under the revised framework, mutual funds can borrow without the 20% cap on net assets, provided they adhere to specific conditions. The borrowing is restricted for purposes such as facilitating unit redemptions or income distributions, and the amount borrowed cannot exceed the day's receivables from recognized institutions. Additionally, each asset management company's board will need to approve intraday borrowing policies, which must be publicly disclosed. Sebi's regulations also extend to equity-oriented index funds and ETFs, allowing them to borrow for closing auction participation, effective from August 3. The initiative underscores Sebi's commitment to maintaining market integrity while ensuring adequate liquidity for mutual funds.