SEBI’s circular dated 5 November 2026 permits an individual mutual fund scheme to net the cash payable and receivable on eligible outright transactions within the same settlement cycle. The change targets settlement efficiency and temporary funding requirements—but it does not permit cross-scheme funding, intraday square-offs or net delivery of securities.
Why does this change matter?
Institutional cash-market trades are delivery-backed and have traditionally been settled on a gross basis at the custodian or client level. That can require a scheme to fund its full purchase obligation while awaiting cash from unrelated eligible sales in the same settlement cycle.
Under the new framework, qualifying sale proceeds can reduce the qualifying purchase-side cash requirement within the same scheme and cycle. The relief is operational: it can reduce temporary cash movement and funding pressure. It does not change scheme ownership, asset allocation, investment limits, NAV computation or the unit-holder’s legal interest.
What is an “outright transaction”?
For this framework, an outright transaction is either a purchase or a sale—but not both—in the same security, by the same mutual fund scheme, in the same settlement cycle.
| Trade pattern within one scheme and cycle | Treatment |
|---|---|
| Security A: purchase only | Outright purchase; eligible for fund netting. |
| Security B: sale only | Outright sale; eligible for fund netting. |
| Security C: both purchase and sale | Non-outright; excluded from netting and settled separately on a gross basis. |
The test applies security by security. A scheme cannot label its overall daily activity as “net buy” or “net sell” and net everything together.
Netting stops at the scheme boundary
- Same scheme only. Eligible purchases and sales may be netted only within one mutual fund scheme.
- Same settlement cycle only. Obligations from different cycles cannot be combined.
- No cross-scheme adjustment. A surplus in one scheme cannot fund a deficit or obligation of another scheme or portfolio.
- Scheme accounting remains intact. The mechanism cannot disturb scheme-wise books, NAV, asset allocation, investment limits or unit-holder interests.
How residual obligations work
If eligible outright purchases exceed eligible outright sales, the scheme must fund the residual net amount. If eligible sales exceed eligible purchases, the excess sale proceeds cannot be used to offset non-outright purchases. Those excluded purchases remain separately funded on a gross basis.
SEBI’s illustration uses three securities:
| Security | Buy value | Sell value | Classification |
|---|---|---|---|
| A | ₹1,000 | Nil | Outright purchase |
| B | ₹1,000 | ₹2,000 | Non-outright |
| C | Nil | ₹2,000 | Outright sale |
Under gross practice, the scheme would have a ₹2,000 fund pay-in and ₹4,000 pay-out. Under the new framework, A and C are netted, while B stays outside the net. The resulting fund obligations become ₹1,000 pay-in and ₹3,000 pay-out. The underlying securities still settle gross.
What remains outside the framework?
The circular expressly excludes:
- Non-outright cash trades. Both buying and selling the same security in the same cycle makes that security ineligible.
- Derivative transactions. Futures, options and other derivative obligations are not covered.
- Securities lending and borrowing. SLB transactions remain outside the scheme.
- Short-sale transactions. The framework does not relax institutional short-sale rules.
- Anything not expressly covered. The permission is limited; it should not be extended by analogy.
Securities, STT and stamp duty do not get netted
Only the fund obligation is eligible for netting. Securities continue to move on a gross basis between the mutual fund scheme and its custodian. Securities Transaction Tax and stamp duty continue to apply on delivery as otherwise required.
The change therefore does not turn institutional trades into day trading, change their delivery-backed character or alter the clearing corporation’s settlement at the clearing-member or custodian level.
Control and audit requirements
AMCs and custodians must be able to identify, scheme by scheme:
- outright purchases and outright sales;
- non-outright transactions excluded from netting;
- gross and net fund obligations; and
- gross securities pay-in and pay-out obligations.
The custodian must preserve a clear audit trail of gross obligations, netted amounts and excluded transactions. AMCs and custodians must prevent cross-scheme adjustment or inter-scheme funding. Trustees must review implementation and satisfy themselves that it protects unit-holder interests.
Implementation standards are still required
AMFI, in consultation with clearing corporations, stock exchanges, custodians and other stakeholders, must formulate implementation standards. These will cover file formats, reporting, confirmations, reconciliation, audit trails, rejected or modified trades, shortfalls, cut-off times, finalisation of eligible obligations and exceptional settlement schedules.
Recognised exchanges and clearing corporations must update their systems, processes, files and reporting formats. AMCs, custodians and brokers must make corresponding changes, while the existing custodian-to-clearing-corporation settlement method remains unchanged.
What should affected entities do before April 2027?
- Map every obligation. Separate funds from securities and identify each scheme, security and settlement cycle in the operating model.
- Build the eligibility logic. Automatically exclude any security with both a purchase and sale in the same cycle and all product types outside the circular.
- Prevent cross-scheme funding. Add hard controls so that one scheme’s sale proceeds never reduce another scheme’s obligation.
- Preserve the gross trail. Store the pre-net obligation, eligibility decision, net amount, exceptions and securities settlement record.
- Prepare for AMFI standards. Keep system specifications adaptable to the prescribed files, cut-offs, confirmations and exception processes.
- Test jointly. AMC and custodian teams should run end-to-end scenarios—including rejected, modified and same-security two-sided trades—before jointly confirming readiness.
- Brief trustees. Provide the control design, test results and unit-holder-interest assessment for trustee review before go-live.
Reviewed on 9 November 2026. The framework takes effect on 1 April 2027; operating procedures should also be checked against the implementation standards to be issued through AMFI and market infrastructure institutions.