SEBI’s Netting Proposal Aims to Ease Mutual Fund Liquidity Crunch
NEWZA Editorial Team••Source: MoneyControl
NEWZAFinancial Intelligence Feed
⚡ Key Financial Takeaways
Netting allows schemes to offset purchases against sales within the same settlement cycle, reducing net cash requirement from Rs 1,000 crore to Rs 200 crore in the example.
The proposal targets individual schemes only, keeping cross‑scheme netting prohibited, and mirrors the earlier net‑settlement framework for FPIs.
Index funds and ETFs stand to gain most, as rebalancing days will see less temporary liquidity pressure and lower borrowing costs.
How Netting Works SEBI’s consultation paper released on 3 September introduces a netting mechanism for mutual fund schemes. Under the current system, a fund that needs to buy shares worth Rs 1,000 crore must arrange the full amount before it receives Rs 800 crore from sales, leaving a net cash requirement of Rs 200 crore. With netting, the scheme can offset the purchase against the sale within the same settlement cycle, so only the Rs 200 crore net amount needs to be mobilised. The securities themselves would still settle on a gross basis, ensuring market integrity.
Impact on Different Fund Types The framework is designed to benefit both active and passive funds. Passive schemes, especially index funds and ETFs, often have minimal cash holdings and must rebalance portfolios on rebalancing days. Netting would allow them to use sale proceeds to fund purchases without borrowing or holding idle cash, reducing temporary liquidity pressure and borrowing costs. Active schemes also stand to gain: purchase obligations must be paid by 10:30 a.m. on T+1, while sale proceeds arrive only after 1:30 p.m.; netting would bridge this intraday gap. Smaller asset‑management companies, with tighter credit lines, could see a proportionally larger benefit, while larger AMCs would enjoy greater absolute rupee savings.
Implementation & Outlook SEBI has invited comments until 24 September. The final framework will specify operational details such as scheme‑level identification and reconciliation of eligible transactions. Cross‑scheme netting remains prohibited to prevent inter‑scheme leakage. While the change is unlikely to produce a visible impact for investors, it will lower short‑term funding requirements and reduce cash drag during heavy portfolio churn. Once implemented, mutual funds can manage cash more efficiently, leading to marginally cleaner tracking for index funds and a smoother rebalancing process overall.
