SEBI's Mutual Fund Borrowing Framework: A Liquidity Reckoning for NRI Investors
The Securities and Exchange Board of India issued a circular on March 13, 2026, formalising a two-tier borrowing framework for mutual funds under the SEBI (Mutual Funds) Regulations, and followed it with an addendum on March 25, 2026, that extended a key compliance deadline to July 15, 2026. Together, these circulars tighten the conditions under which asset management companies can borrow, separating short-term borrowing from intraday borrowing and attaching distinct rules to each. For NRI investors who hold positions in Indian mutual fund schemes, the timing matters: the primary framework kicks in on April 1, 2026, with a second tranche of restrictions affecting equity-oriented index funds and ETFs coming into force on April 1, 2026, as set out in the March 13 circular.
The operational gap between how different scheme types adapt to that single effective date is where most of the risk for investors sits.
Key Points
- SEBI's March 13, 2026 circular, supplemented by the March 25, 2026 addendum extending the compliance deadline to July 15, 2026, establishes a codified borrowing framework with an April 1, 2026 primary effective date.
- Short-term borrowing is capped at 20% of scheme net assets for a maximum duration of six months, covering redemptions, repurchases, interest payments, and IDCW payouts.
- Intraday borrowing sits outside the 20% cap but is bounded by a firm ceiling: the amount borrowed cannot exceed same-day guaranteed receivables from the Government of India, the Reserve Bank of India, or the Clearing Corporation of India Limited, including TREPS maturity proceeds and reverse repo proceeds.
- Equity-oriented index funds and ETFs may borrow for under-executed sell trades only within the equity cash segment Closing Auction Session, a restriction effective April 1, 2026.
- All intraday borrowing policies must be approved by both the AMC Board and the Board of Trustees, and must be publicly hosted on the AMC's website.
- Costs and losses arising from delays or non-receipt of guaranteed receivables are borne by the AMC, not the scheme or its investors.
- NRI investors should review the board-approved borrowing policy of any scheme they hold, now publicly available on AMC websites.
- Schemes with high redemption volatility, particularly liquid and overnight funds, are most affected by the intraday borrowing restrictions.
- Equity ETF investors should check how their fund house plans to manage the Closing Auction Session restriction, which is already in effect from April 1, 2026.
- The AMC's obligation to bear intraday borrowing losses protects scheme NAV, which directly protects NRI investors' repatriation amounts.
The Two-Tier Framework: What Changed and What Didn't
Before this circular, the borrowing norms for mutual funds operated under a degree of regulatory ambiguity, particularly around intraday borrowing in liquid and overnight schemes. The industry had developed a common practice of using intraday borrowing to bridge the timing gap between investor redemptions, which are paid out on T+1, and the receipt of maturity proceeds on the same day. SEBI has now acknowledged this practice explicitly and codified it, which is actually a form of regulatory validation, not a crackdown.
The short-term borrowing cap of 20% of net assets with a six-month maximum duration was already permitted under the mutual fund regulations. What the March 13 circular and the March 25 addendum do is operationalise that permission with clear eligible uses and governance requirements. The eligible uses under short-term borrowing are unit repurchases and redemptions, interest payments, IDCW payouts, and trade settlements for equity-oriented index funds and ETFs arising from under-executed sell trades.
Intraday borrowing sits outside the 20% cap. But from April 1, 2026, it is restricted to redemptions, repurchases, interest payments, and IDCW payouts only, and the amount borrowed is capped at same-day guaranteed receivables from sovereign-backed counterparties. That ceiling is a meaningful constraint for any AMC that was using intraday lines more loosely, because it ties borrowing capacity directly to what the fund is actually owed that day, not to any broader credit line.
| Borrowing Type | Cap | Maximum Duration | Eligible Uses from April 1, 2026 | Cost Bearer |
|---|---|---|---|---|
| Short-term (Reg 42(1)) | 20% of net assets | 6 months | Redemptions, repurchases, interest, IDCW, ETF trade settlements | Scheme |
| Intraday (Reg 42(2)) | Capped at same-day guaranteed receivables | Same day only | Redemptions, repurchases, interest, IDCW only | AMC |
The Equity Fund Closing Auction Provision That Most Analysts Are Underweighting
The provision that deserves more attention than it's getting is the equity index fund and ETF borrowing restriction, also effective April 1, 2026. From that date, borrowings by equity-oriented index funds and equity-oriented ETFs under the short-term borrowing regulation will be permitted only for facilitating participation in the equity cash segment Closing Auction Session, as defined in SEBI's circular dated January 16, 2026.
What this means in practice is that fund managers running index funds or ETFs can no longer borrow to cover under-executed sell trades outside the Closing Auction Session window. If a large redemption comes in and the fund needs to liquidate positions but the sell orders don't execute fully during regular market hours, the fund can't borrow against that shortfall until the Closing Auction Session. For funds tracking indices with relatively illiquid mid-cap or small-cap constituents, this creates a real operational constraint.
AMCs running index funds and ETFs need to restructure their liquidity management processes before April 1, 2026. That's a short runway for large fund houses managing multiple ETF products across market-cap segments, and the March 25 addendum's July 15 deadline extension applies to specific compliance documentation, not to the core borrowing restrictions themselves.
What This Means for NRI Investors Specifically
NRI investors in Indian mutual funds face a set of considerations that domestic investors don't. Repatriation timelines, foreign exchange exposure, and the additional documentation requirements around NRE and NRO accounts mean that redemption delays hit NRIs harder than resident investors. A fund that is borrowing at the edge of its 20% cap to meet a redemption wave is a fund that could slow down payout timelines, even if only marginally.
The governance requirement that intraday borrowing policies be approved by the AMC Board and the Trustee Board, and hosted publicly on the AMC's website, is actually useful for NRI investors. It creates a paper trail. Before parking capital in a scheme, NRI investors can now check whether the fund's board-approved borrowing policy is conservative or aggressive, and whether the scheme's intraday receivables are concentrated in TREPS and reverse repos or in less liquid instruments.
The provision that costs and losses from delayed or non-receipt of guaranteed receivables are borne by the AMC rather than the scheme is investor-friendly. It means that if an intraday borrowing goes wrong because a counterparty fails to deliver on time, the AMC absorbs the cost. That's a meaningful protection for scheme investors, including NRIs, who would otherwise see NAV erosion from a treasury management failure that had nothing to do with the underlying portfolio.
The Bull and Bear Case for AMCs Under This Framework
The bull case for AMCs is straightforward. Codified borrowing norms reduce regulatory uncertainty. Fund managers now know exactly what they can and can't do, and the governance requirements, while adding compliance overhead, also give AMCs a defensible framework if a redemption crisis occurs. The AMC-bears-the-cost provision on intraday borrowing failures actually incentivises better treasury management, which is good for the industry's long-term credibility.
The bear case is more textured. AMCs running large equity ETFs need to restructure their redemption management processes around the Closing Auction Session constraint. Fund houses that haven't built out that liquidity playbook risk widening bid-ask spreads on ETF units during high-redemption periods, which hurts all investors in those products.
The compliance cost of maintaining board-approved policies, hosting them publicly, and ensuring they stay current adds to operational expense, which eventually shows up in total expense ratios.
There's also the question of what happens to funds that are currently borrowing beyond what the new framework permits, whether in duration, amount, or eligible use. SEBI hasn't published a transition relief mechanism for such funds. The April 1, 2026 effective date is hard, and any fund that needs to restructure its borrowing arrangements has had limited time to do so.
Governance as the Real Story Here
The most underappreciated element of this circular isn't the borrowing caps. It's the governance architecture SEBI is building around them. Requiring AMC Board and Trustee Board approval for intraday borrowing policies, mandating public disclosure on AMC websites, and placing the cost of borrowing failures on the AMC rather than the scheme, these are structural changes to how mutual fund liquidity risk is owned and disclosed in India.
SEBI has been moving in this direction since the Franklin Templeton debt fund crisis of 2020, when six schemes were wound up after liquidity management failures exposed how little visibility investors had into fund-level borrowing and redemption practices. The March 2026 framework is the most explicit codification of that lesson to date. It won't prevent every liquidity stress event, but it does create accountability that didn't exist before.
For NRI investors, the public disclosure requirement is the single most actionable takeaway from this circular. Before April 1, 2026, check the AMC website of every scheme you hold. If the board-approved intraday borrowing policy isn't there yet, that's a flag worth noting.
The April 2026 changes are manageable for most AMCs and most investors, but the equity ETF Closing Auction Session restriction is the one to watch closely. Fund houses running large passive products, particularly those tracking indices with meaningful mid-cap exposure, face a genuine operational test right now. How the major ETF providers communicate their Closing Auction Session liquidity approach over the coming weeks will say more about their preparedness than any regulatory filing will.