Currently, for liquid and overnight schemes, redemption payments to investors are processed in the morning hours of T+1 day, while mutual fund schemes receive TREPS (triple repo on government securities) and reverse repo in the evening hours of T+1 day.
In order to cope with the inflow and outflow of money today, mutual funds enter into formal internal borrowing arrangements with financial institutions such as banks.
Starting next month, mutual funds will have to have a policy for using internal borrowing facility approved by the Asset Management Company (AMC) and Board of Trustees, the regulator said.
It said that internal borrowing should be used only for redemption or redemption of units or for payment of interest or for payment of income distribution and capital withdrawals to units.
The amount of internal loans should not exceed the guaranteed receivables on the same day.
Eligible receipts include endowment proceeds from TREPS, repatriation transfers, government securities, treasury bills, government development loans, and interest payments on government securities. While the new rules allow mutual fund schemes to borrow up to 20% of their net assets for a maximum period of six months, for cash-refunding units or interest-refunding units, Sebi clarified that internal borrowing will not be subject to the 20% limit, provided certain conditions are met.
The regulator also said that the cost of internal borrowing should be borne by the AMC, and any loss arising from the delay in receiving the funds should not be passed on to the investors.
Separately, Sebi said that borrowings by equity-based index funds and exchange-traded funds due to unexecuted sell trades will only be allowed to participate in the closed auction session in the equity cash segment, when the mechanism becomes operational on August 3, 2026.
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