SEBI Approves Scheme‑Level Net Settlement of Funds for Mutual Fund Cash‑Market Trades Effective April 2027

The Securities and Exchange Board of India (SEBI) released a circular on November 5, 2026 that authorises net settlement of funds for outright cash‑market transactions undertaken by mutual fund schemes, with the framework slated to become effective on April 1, 2027 [1].

Background to the new framework

SEBI’s Master Circular for Stock Exchanges and Clearing Corporations dated December 30, 2024 already barred institutional investors from day‑trading, requiring delivery‑backed, gross settlement of trades at the custodian or client level [1]. In April 2024, SEBI also permitted foreign portfolio investors (FPIs) to settle funds on a net basis while keeping securities settlement gross, with implementation due by December 31, 2026 [1]. Building on that precedent, the latest circular extends net‑fund settlement to domestic mutual fund schemes.

Scope and definition

The circular defines an “outright transaction” as either a purchase or a sale of a security within a single settlement cycle, but not both [1]. Only such outright purchases and sales are eligible for netting; transactions that involve both buy and sell of the same security in the same cycle are classified as non‑outright and remain subject to gross settlement [1]. The framework excludes derivative trades, securities‑lending‑borrowing, short‑sale‑related transactions and any other transaction not expressly covered [1].

Mechanics of scheme‑level netting

Netting is permitted only within the same mutual fund scheme and the same settlement cycle. No cross‑scheme netting or inter‑scheme funding is allowed, and the AMC and custodian must ensure that the netting process does not affect scheme‑wise accounting, NAV computation, investment limits or unit‑holder interests [1].

• Residual obligations: If outright sales are less than outright purchases, the shortfall must be funded by the scheme itself. If sales exceed purchases, the excess proceeds are not used to offset non‑outright purchase obligations, which continue to be funded on a gross basis [1].
• Securities settlement: Settlement of securities remains on a gross basis, and STT and stamp duty continue to be levied on a delivery basis [1].
• Operational safeguards: AMCs, custodians and trustees must put in place systems to identify outright versus non‑outright trades, maintain audit trails, and prevent any cross‑scheme adjustments [1].

Implementation timeline and responsibilities

The circular directs AMFI, in consultation with recognised clearing corporations, stock exchanges, custodians and other stakeholders, to formulate detailed implementation standards covering file formats, reporting timelines, reconciliation mechanisms and audit‑trail requirements [1]. All market participants – AMCs, custodians, stock brokers, recognised exchanges and clearing corporations – are advised to ready their systems and processes, with AMCs and custodians jointly confirming readiness before the April 1, 2027 go‑live date [1].

Expected impact on the mutual fund ecosystem

By allowing net settlement of funds for outright transactions, the framework is expected to reduce temporary funding requirements for mutual fund schemes, thereby improving liquidity management and potentially lowering transaction costs. However, because securities settlement and tax obligations remain gross, the fundamental delivery‑backed nature of institutional trades is unchanged [1].

Open questions

The circular does not specify the exact reporting formats or cut‑off times, leaving those details to forthcoming AMFI standards. Market participants will need clarity on how residual obligations are to be reflected in daily NAV calculations and whether any technology upgrades will be required to segregate outright from non‑outright trades in real time.

Bottom line

SEBI’s net‑settlement framework represents a targeted operational enhancement for mutual fund schemes, balancing efficiency gains with the preservation of existing settlement safeguards. The April 2027 implementation will require coordinated system upgrades across the mutual fund value chain.

Prior to this circular, all fund obligations for mutual fund schemes were settled on a gross basis, meaning each purchase and sale required separate cash flows with the custodian. SEBI’s 2024 Master Circular prohibited intra‑day square‑off trades for institutional investors, reinforcing delivery‑backed settlement. The April 2024 permission for FPIs to settle funds on a net basis set a regulatory precedent that SEBI has now extended to domestic mutual funds [1].

The change directly affects asset‑management companies, custodians and unit‑holders by potentially lowering the cash that schemes must keep on hand for settlement, thereby improving liquidity efficiency. For the Indian market, smoother settlement processes can enhance overall market stability and may encourage more efficient fund operations, aligning India’s settlement practices with global trends.

If AMCs and custodians implement the net‑settlement mechanism efficiently, mutual fund schemes could see reduced short‑term funding needs, potentially lowering borrowing costs and improving NAV stability. The requirement for robust audit trails and system upgrades may spur investment in settlement technology across the industry. Additionally, clearer fund‑level cash flow management could enhance transparency for unit‑holders.

The circular leaves several operational details – such as file formats, cut‑off times and reconciliation procedures – to future AMFI standards, creating short‑term uncertainty. Inadequate system readiness could lead to settlement mismatches or audit‑trail gaps, exposing AMCs to regulatory scrutiny. Moreover, residual obligations for non‑outright trades remain on a gross basis, so cash flow benefits may be limited for schemes with mixed transaction types.