On 5 November, the Securities and Exchange Board of India (SEBI) permitted mutual fund schemes to undertake net settlement of funds for outright transactions in the cash market, with effect from 1 April 2027.
This allows schemes to offset purchase and sale obligations within the same settlement cycle, reducing temporary funding requirements and streamlining the settlement process.
The facility will be available only for transactions undertaken within the same mutual fund scheme during the same settlement cycle. Funds cannot be netted across different schemes, nor can obligations be adjusted between multiple schemes or portfolios.
SEBI has defined an “outright transaction” as either a purchase or a sale of a particular security during a settlement cycle, but not both. Accordingly, if a mutual fund scheme purchases and sells the same security during the same cycle, both transactions will be treated as non-outright and will not qualify for net settlement of funds.
The framework excludes derivatives, securities lending and borrowing, short sales and any other transactions not specifically covered by the circular.
Further, SEBI has clarified that where the value of outright sales is lower than that of outright purchases, the mutual fund scheme must meet the shortfall. However, where outright sales exceed outright purchases, the excess sale proceeds cannot be used to meet non-outright purchase obligations. Such obligations must continue to be settled separately on a gross basis.
The circular also clarifies that securities will continue to be settled on a gross basis between the mutual fund scheme and its custodian. Securities Transaction Tax and stamp duty will also continue to be levied on a delivery basis, wherever applicable. The framework, therefore, does not alter the requirement that institutional trades in the cash market must be delivery-backed.
Asset management companies and custodians must establish systems for scheme-wise identification of outright purchase and sale transactions, non-outright transactions, gross fund obligations and net fund obligations. Custodians must also maintain records of gross obligations, netted fund obligations and excluded non-outright transactions.
Moreover, the trustees of mutual fund schemes must review the implementation of the framework to ensure that it protects the interests of unit-holders.
The Association of Mutual Funds in India (AMFI) will formulate implementation standards in consultation with clearing corporations, stock exchanges, custodians and other relevant stakeholders.
These standards will address file formats, reporting requirements, settlement timelines, reconciliation mechanisms and audit trail requirements, among other aspects.
The net settlement facility will be operational from 1 April 2027, subject to the implementation standards formulated by AMFI.