SEBI on 3 September 2026 proposed letting mutual fund schemes settle their cash market money obligations on a net basis instead of gross. Share delivery stays unchanged. Public comments are open till 24 September 2026.
What SEBI has actually proposed
The consultation paper deals only with the money leg of a trade, not the shares themselves.
At present, when a mutual fund scheme buys shares on the NSE or BSE, it must arrange the full purchase amount separately. It cannot use the money coming in from shares the same scheme sold in the same settlement cycle.
SEBI wants to change this for what it calls “outright transactions”. In plain terms, an outright transaction is a security in which the scheme has either bought or sold during a settlement cycle but not both.
Only the cash would be netted. The shares would still move security by security on a gross basis, so the delivery-backed nature of institutional trades stays intact.
SEBI said the aim is ease of doing business, better settlement efficiency and lower temporary liquidity requirements for schemes.
Why schemes arrange cash they do not really owe
SEBI’s Master Circular for Stock Exchanges and Clearing Corporations dated 30 December 2024 bars institutional investors from squaring off trades intraday. Their trades have to be delivery-backed and are grossed at the custodian’s level.
The result is that a scheme funds every purchase on its own, even when sale proceeds are due to it in the very same cycle.
SEBI said this creates liquidity pressure, operational inefficiency and reliance on short-term funding arrangements, even where the scheme’s actual net cash requirement is small.
The strain is sharpest on index rebalancing days, when passive funds have to reshuffle their portfolios, and on days with large investor subscriptions or redemptions.
The regulator also noted that the Mutual Fund Advisory Committee had recommended net settlement for domestic institutions, in line with what FPIs already get, during discussions on intraday borrowing by mutual funds. The proposed framework may reduce how much intraday borrowing schemes need.
A worked example from SEBI’s paper
SEBI used the illustration below to explain how the mechanism would work. These are sample figures used by the regulator, not actual trades.
| Security | Buy value | Sell value | Treatment |
|---|---|---|---|
| A | ₹1,000 | Nil | Outright purchase |
| B | ₹1,000 | ₹2,000 | Non-outright, excluded from netting |
| C | Nil | ₹2,000 | Outright sale |
Security B has both a buy and a sell in the same cycle, so it is treated as non-outright and kept out of netting. Only A and C can be set off against each other.
That single change moves the scheme’s fund obligations as follows.
| Fund obligation | Current gross settlement | Proposed net settlement |
|---|---|---|
| Pay-in (money the scheme puts in) | ₹2,000 | ₹1,000 |
| Pay-out (money the scheme receives) | ₹4,000 | ₹3,000 |
The scheme’s funding requirement falls only to the extent netting is allowed. Security B’s obligations are settled gross in both cases.
Where the netting will not apply
SEBI has drawn the boundaries tightly. The proposal would not allow:
- Netting for any security that has both a purchase and a sale in the same settlement cycle
- Netting across different schemes of the same mutual fund or the same AMC
- Adjustment of obligations between two or more schemes or portfolios
- Netting of the securities leg delivery stays gross between the scheme and its custodian
- Any change in STT (Securities Transaction Tax) or stamp duty, which continue on a delivery basis
On leftover amounts, SEBI proposed two rules. If outright sales are worth less than outright purchases, the scheme funds the balance itself, along with purchase obligations from non-outright securities.
If outright sales are worth more, that surplus cannot be adjusted against non-outright purchase obligations. Any outside funding used for the balance must still follow the borrowing rules that apply to mutual funds.
AMCs, mutual funds and custodians would have to identify outright and non-outright trades scheme-wise, along with gross and net fund obligations. The custodian would keep an audit trail, and trustees would review implementation from the unit holders’ point of view.
The FPI rule that came first
This is not a fresh idea. SEBI issued a circular on 24 April 2026 permitting net settlement of funds for outright cash market transactions by foreign portfolio investors (FPIs).
That framework kept securities settlement on a gross basis and left STT and stamp duty on a delivery basis, the same design now proposed for mutual funds. It is to be implemented by 31 December 2026.
What happens next
SEBI has sought public comments by 24 September 2026 through its online web-based form, on four specific questions. These include whether netting should be permitted at all, whether same-security buy-and-sell trades should stay excluded, and whether the framework should start with cash market trades only.
A draft circular is attached as Annexure A to the paper. Its implementation date has been left blank for now.
If the rule is notified, AMFI would frame the implementation standards along with custodians, recognised clearing corporations and stock exchanges. These would cover file formats, confirmation and settlement timelines, reconciliation, audit trails, rejected or unconfirmed trades and exception handling.
Stock exchanges and clearing corporations would then have 30 days from the issue of those standards to put out operational guidelines.
What it means for a retail investor
Nothing changes in how you buy, hold or redeem mutual fund units. This is a settlement-side change between AMCs, custodians and clearing corporations.
SEBI has specifically said the mechanism must not affect scheme-wise accounting, valuation, daily NAV computation, segregation of securities and funds, or unit holder interest.
If you hold mutual fund units or ETFs in a demat account, the way units are credited to you stays exactly the same. Investors who track index funds and ETFs through an online trading platform will see no change in order placement or pricing either.
The benefit, if the proposal becomes a rule, is operational. Schemes may need less short-term and intraday funding on days when they are both buying and selling heavily.
Investments in securities markets are subject to market risks. This article is for information only and is not investment advice.
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