The reform permits eligible purchase and sale fund obligations to be netted exclusively within the same mutual fund scheme during an individual settlement cycle. However, actual delivery of securities will stay on a gross settlement basis, and managers are strictly barred from transferring funds between separate schemes to clear obligations. Furthermore, trades involving both buy and sell orders for the exact same security in a single cycle will be treated as non-outright trades and settled on a gross basis. Market infrastructure institutions and the Association of Mutual Funds in India are currently updating systems and standards to prepare for the rollout.
Key points
Mutual funds cannot use excess sales proceeds or inter-scheme funding to cover obligation…: Mutual funds cannot use excess sales proceeds or inter-scheme funding to cover obligations for non-outright or separate portfolio transactions.
Transactions involving derivatives, securities lending and borrowing, and short sales are…: Transactions involving derivatives, securities lending and borrowing, and short sales are completely excluded from the net settlement mechanism.
Securities transaction tax and stamp duty will continue to be levied on a standard delive…: Securities transaction tax and stamp duty will continue to be levied on a standard delivery basis under the updated rules.
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The Securities and Exchange Board of India (Sebi) has permitted mutual fund schemes to net their fund settlement obligations for outright cash market transactions, a move aimed at reducing temporary funding requirements and improving operational efficiency.
In a circular issued on Thursday, the market regulator said that mutual fund schemes will be allowed to offset eligible purchase and sale obligations within the same scheme and settlement cycle. The rules will come into effect from 1 April 2027.
Currently, institutional investors are required to settle their cash market transactions on a gross basis at the custodian or client level, with trades being delivery-backed. Sebi’s latest move changes the treatment of fund obligations for eligible mutual fund transactions, without altering the requirement for securities to be settled on a gross basis.
An outright transaction is either a purchase or a sale in a particular security during the same settlement cycle, but not both. If a mutual fund scheme undertakes both purchase and sale transactions in the same security within a settlement cycle, those trades will be classified as non-outright transactions and will…
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