The Securities and Exchange Board of India (“SEBI”) has issued a circular dated March 13, 2026 (“Circular”), providing an operational framework for borrowing by mutual funds under the SEBI (Mutual Funds) Regulations, 2026 (“MF Regulations”), which come into force on April 1, 2026.

Regulation 42(1) of the MF Regulations permits mutual funds to borrow up to 20% (twenty percent) of their net assets for specified purposes. These purposes include: (i) repurchase or redemption of units; (ii) payment of interest; (iii) Income Distribution cum Capital Withdrawal (“IDCW”) payouts to unitholders; and (iv) settlement of trades by equity-oriented index funds and equity-oriented Exchange Traded Funds (“ETFs”) where there is under execution of sell trades on the stock exchange. The duration of such borrowings is capped at 6 (six) months. Regulation 42(2) separately provides that the 20% (twenty percent) cap does not apply to intraday borrowings, subject to conditions prescribed by SEBI, which are now set out in this Circular.

The Circular records prevalent industry practice in liquid and overnight schemes. In such schemes, investor redemptions are typically paid out on the morning of T+1, while maturity proceeds are received by the mutual fund schemes only in the evening of the same day. This creates a timing mismatch, which necessitates intraday borrowing arrangements by the mutual funds with banks and other financial institutions to bridge the gap.

With effect from April 1, 2026, intraday borrowings may be used only for redemptions, repurchases, interest payments and IDCW payouts. These borrowings must be governed by a policy approved by the Board of the Asset Management Company (“AMC”) and Board of Trustees, and this policy is required to be hosted on the AMC’s website.

The Circular further provides that the amount of intraday borrowings shall not exceed the guaranteed receivables due on the same day from Government of India, Reserve Bank of India and Clearing Corporation of India Limited. It lists the following receivables as eligible:

(i) maturity proceeds from TREPS;

(ii) proceeds from reverse repo;

(iii) maturity proceeds from G-Sec / T-bill / SDL / STRIPS;

(iv) interest on G-Sec / SDL; and

(v) sale proceeds of G-Sec / T-bill / SDL / STRIPS.

AMCs must also ensure compliance with clauses 6 and 7 of the Fourth Schedule to the MF Regulations and the SEBI Master Circular for Mutual Funds dated June 27, 2024. This includes the principle that the cost of intraday borrowing, and any loss or cost incurred, on account of any unforeseen event or delay arising from non-receipt of the identified receivables, is to be borne by the AMC.

Separately, the Circular clarifies that borrowings by equity-oriented index funds and equity-oriented ETFs on account of under executed sell trades, as permitted under Regulation 42(1) of the MF Regulations, are confined to facilitating participation in the equity cash segment closing auction session introduced by SEBI’s circular dated January 16, 2026. This will be effective from August 3, 2026, and must follow the modalities set out therein.

Please find attached a copy of the Circular, here.

This update has been contributed by Adity Chaudhury (Partner) and Suvanwesh Das (Associate).

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