For a mutual fund scheme, buying and selling securities is not simply a matter of deciding what to add or remove from the portfolio. Behind every trade sits a settlement process involving the fund, broker, custodian and clearing infrastructure.
That settlement process can also create a temporary cash-flow problem.
A mutual fund scheme may sell one set of securities and buy another set of securities during the same settlement cycle. Economically, the sale proceeds may help fund the purchases. But under the existing gross-settlement framework, the scheme may still need to arrange funds for purchase obligations separately while waiting for sale proceeds.
This becomes particularly relevant during index rebalancing, large portfolio changes and periods of substantial investor subscriptions or redemptions.
On 3 September 2026, the Securities and Exchange Board of India (SEBI) issued a consultation paper proposing to permit net settlement of funds for transactions undertaken by mutual fund schemes in the cash market, while continuing to settle securities on a gross basis. SEBI has invited public comments on the proposal up to 24 September 2026.
The distinction between what is proposed and what is already law is extremely important.
As of 16 September 2026, this is a consultation proposal, not a general final rule already available for mutual funds to use.
So what exactly is SEBI proposing?
And if the proposal eventually becomes effective, what would change for mutual fund schemes, asset management companies (AMCs), custodians and the broader settlement process?
What Is SEBI Proposing?
SEBI is proposing to allow mutual fund schemes to net certain fund obligations arising from eligible cash-market transactions.
The proposal is deliberately narrow.
It does not propose to allow mutual funds to simply net all purchases against all sales.
Instead, it focuses on transactions described as “outright transactions.”
Under the proposed framework, an outright transaction means either:
- A purchase transaction in a security during a settlement cycle; or
- A sale transaction in a security during a settlement cycle,
but not both in the same security during that settlement cycle.
This distinction is central to understanding the proposal.
If a scheme only buys Security A during a settlement cycle, that transaction may qualify as an outright purchase.
If it only sells Security B during the same settlement cycle, it may qualify as an outright sale.
But if the scheme both buys and sells Security C during the same settlement cycle, Security C would be treated as non-outright and would remain outside the proposed netting mechanism.
Why Is SEBI Considering This Change?
The existing settlement process can require a mutual fund scheme to arrange funds for purchase transactions independently of sale proceeds that it expects to receive in the same settlement cycle.
That can create a temporary liquidity requirement even when the overall portfolio transaction is not creating a corresponding long-term cash shortage.
Consider a simple example.
A mutual fund scheme sells securities worth ₹50 crore and purchases other securities worth ₹48 crore.
Economically, the scheme may appear to have a net cash surplus of ₹2 crore.
But if the purchase and sale obligations are required to be funded separately, the scheme may need to arrange substantial funds before receiving the sale proceeds.
SEBI’s consultation paper notes that this issue can become more significant during events such as index rebalancing and periods of large investor subscriptions or redemptions.
The proposed framework is intended to reduce this temporary funding requirement and improve settlement efficiency without weakening delivery-based settlement or scheme-level investor safeguards.
What Does “Net Settlement of Funds” Actually Mean?
This is where many readers may initially misunderstand the proposal.
SEBI is not proposing trade netting or securities delivery netting.
The proposal concerns the funding side of settlement.
The securities themselves would continue to be settled on a gross basis.
In practical terms, the proposed framework could work like this:
| Particulars | Current gross approach | Proposed approach |
|---|---|---|
| Eligible purchase obligation | ₹10 crore | ₹10 crore |
| Eligible sale proceeds | ₹8 crore | ₹8 crore |
| Fund movement | Separate gross obligations | Net fund obligation of ₹2 crore |
| Securities settlement | Gross | Gross |
| Trade/delivery netting | Not permitted | Not permitted |
Therefore, the proposal does not mean that a mutual fund can simply deliver fewer securities because it has purchased securities in the same period.
The securities settlement remains gross.
The proposed relief is on the cash-funding obligation.
A Simple Example of the Proposed Mechanism
SEBI itself provides an illustration in its consultation paper.
Suppose a mutual fund scheme has the following transactions during a settlement cycle:
| Security | Purchase | Sale | Proposed treatment |
|---|---|---|---|
| Security A | ₹1,000 | Nil | Outright purchase |
| Security B | ₹1,000 | ₹2,000 | Non-outright |
| Security C | Nil | ₹2,000 | Outright sale |
Under the existing gross approach, the fund obligations are treated separately.
The proposed framework would allow the outright purchase in Security A and outright sale in Security C to be considered for net fund settlement.
Security B would remain outside the netting because the scheme has both purchased and sold that security during the same settlement cycle.
Therefore, the proposed fund movement could be:
| Particulars | Current practice | Proposed mechanism |
|---|---|---|
| Funds pay-in | ₹2,000 | ₹1,000 |
| Funds pay-out | ₹4,000 | ₹3,000 |
The important point is that Security B remains gross-settled.
This example shows why the proposal is more targeted than a general permission to net all mutual fund transactions.
Which Transactions Would Be Eligible?
The proposed framework is intended for outright buy or sell transactions undertaken by mutual fund schemes in the cash market on recognised stock exchanges.
Broadly:
Only purchases in a security
If a scheme purchases a security during the settlement cycle and does not sell that same security during the cycle, it may qualify as an outright purchase.
Only sales in a security
If a scheme sells a security and does not purchase the same security during the settlement cycle, it may qualify as an outright sale.
Both purchase and sale of the same security
If the scheme buys and sells the same security during the same settlement cycle, the security would be treated as non-outright for that cycle.
That transaction would remain subject to gross settlement.
This security-specific test is important because a fund cannot simply look at its total purchases and total sales and assume that the entire difference can be netted.
Why Is the “Same Security” Rule Important?
Suppose a mutual fund sells ₹20 crore of shares of Company X and buys ₹15 crore of Company X during the same settlement cycle.
It may be tempting to say:
“Only ₹5 crore is really the net position, so why not settle ₹5 crore?”
The proposed framework does not take that approach.
Because the scheme has both a purchase and sale transaction in the same security during the settlement cycle, that security would be classified as non-outright for the purpose of the proposed mechanism.
The transactions would therefore remain outside the proposed fund netting.
This helps preserve the existing delivery-backed settlement discipline.
Netting Would Be Allowed Only at Scheme Level
Another major safeguard is the proposed scheme-level restriction.
Mutual funds commonly operate several schemes under the same AMC.
For example, one AMC may operate:
- An equity large-cap scheme
- A mid-cap scheme
- A balanced scheme
- A debt scheme
- An index scheme
The fact that one scheme has excess sale proceeds does not mean those funds can automatically be used to meet another scheme’s purchase obligations.
SEBI’s proposal specifically states that net settlement should be permitted only at the level of the individual mutual fund scheme.
No netting would be permitted across different schemes of the same mutual fund or AMC.
This is consistent with the broader principle that the assets and liabilities of individual schemes must remain separately identifiable and ring-fenced.
Why Scheme-Wise Accounting Still Matters
This proposed change does not reduce the importance of scheme-wise accounting.
In fact, if the proposal becomes effective, accurate scheme-level accounting may become even more important.
Each scheme would still need to maintain proper records of:
- Purchases
- Sales
- Outright purchases
- Outright sales
- Non-outright transactions
- Gross obligations
- Net fund obligations
- Securities pay-in
- Securities pay-out
- Reconciliation differences
- Settlement exceptions
The custodian would also need a clear audit trail showing how gross obligations were identified and how the permitted net fund obligation was calculated.
SEBI’s proposal specifically states that the netting mechanism should not interfere with scheme-wise accounting, valuation, daily NAV computation, segregation of securities and funds, or unit-holder interests.
What Happens If Purchases Are Higher Than Sales?
Suppose eligible outright purchases are ₹100 crore and eligible outright sales are ₹70 crore.
The scheme would not receive a blanket ₹70 crore reduction across all its obligations.
Under the proposed mechanism, the ₹70 crore of eligible sale proceeds could be considered against the eligible outright purchase obligations, leaving a residual ₹30 crore funding requirement.
In addition, purchase obligations arising from non-outright transactions would continue to require funding.
This means the netting mechanism would not allow an outright sale surplus to be freely used against every other purchase obligation of the scheme.
What If Sales Are Higher Than Purchases?
Now consider the opposite situation.
Suppose eligible outright sales are ₹100 crore while eligible outright purchases are ₹70 crore.
The ₹70 crore may be considered for net settlement against the eligible purchase obligation.
But the excess ₹30 crore sale proceeds cannot simply be adjusted against purchase obligations arising from non-outright transactions under the proposal.
This restriction prevents the netting framework from becoming a general-purpose cross-category adjustment mechanism.
The remaining obligations continue to be governed by the applicable settlement and funding framework.
Securities Will Still Be Settled on a Gross Basis
This deserves special emphasis.
The proposal does not change the basic delivery principle.
If a mutual fund has to deliver securities because it has sold them, the securities settlement remains gross.
Similarly, securities purchased by the scheme continue to be delivered to the scheme in accordance with the applicable settlement process.
Therefore:
Fund netting ≠ securities netting.
That distinction should be understood by finance teams, custodians and compliance professionals before assessing the potential operational benefit.
Will STT and Stamp Duty Change?
The proposal does not seek to convert the relevant securities transactions into some new form of non-delivery settlement for taxation purposes.
SEBI has specifically stated that Securities Transaction Tax (STT) and stamp duty would continue to be levied on a delivery basis, as applicable.
Therefore, mutual funds and their advisers should not assume that a permitted fund-netting mechanism changes the applicable statutory levy framework.
The proposed reform is principally about settlement efficiency and temporary liquidity requirements.
What Could Be the Benefit for Mutual Fund Schemes?
If implemented, the proposal could have several operational benefits.
Lower temporary funding requirements
A scheme may need to arrange less temporary cash where eligible purchase and sale obligations can be netted.
Better settlement efficiency
The scheme’s actual funding requirement may more closely reflect the net cash movement from eligible transactions.
Reduced dependence on short-term funding
Where temporary liquidity needs are reduced, there may be less need to arrange short-term funds for settlement purposes, subject to the applicable borrowing framework.
Easier portfolio rebalancing
Large portfolio changes can create substantial temporary funding requirements. Net fund settlement could make these operations more efficient.
Better cash management
Treasury and fund-management teams may be able to manage liquidity more efficiently.
Index Rebalancing Could Be an Important Use Case
Passive funds can experience significant trading activity when an underlying index is rebalanced.
Suppose a large index fund has to sell ₹500 crore of securities that are leaving an index and purchase ₹500 crore of securities entering the index.
Under a gross-funding model, the timing of the cash inflows and outflows matters significantly.
A net fund settlement mechanism could reduce the temporary cash requirement where the transactions satisfy the proposed eligibility conditions.
However, the actual benefit would depend on the transaction pattern.
If the same security contains both purchase and sale transactions within the relevant settlement cycle, the proposed rules would exclude it from netting.
So the scheme cannot assume that every index-rebalancing transaction will automatically receive the benefit.
Large Subscriptions and Redemptions Can Also Matter
Liquidity pressure can arise not only from portfolio rebalancing but also from investor flows.
Imagine a mutual fund scheme experiencing substantial redemptions.
The scheme may need to sell securities to generate liquidity.
At approximately the same time, another part of the portfolio may need to be repositioned through purchases.
The ability to net eligible fund obligations could potentially reduce temporary funding pressure.
Again, this would depend on the final framework and the precise classification of the transactions.
What Controls Would AMCs Need?
If the proposal is eventually implemented, AMCs and custodians would need strong controls.
A practical control framework could include:
Trade classification
Each transaction should be correctly classified as:
- Outright purchase
- Outright sale
- Non-outright
Scheme identification
Every obligation should be linked to the correct mutual fund scheme.
Gross and net calculation
The system should separately calculate gross obligations and permitted net fund obligations.
Reconciliation
Trade records, broker files, custodian records and clearing records should be reconciled.
Exception handling
Rejected, partially confirmed or unmatched trades should have a documented treatment.
Audit trail
The system should preserve sufficient information to reconstruct how the net obligation was calculated.
Cross-scheme controls
Systems should prevent accidental use of one scheme’s cash position to settle another scheme’s obligation.
These controls are particularly important because a settlement system should not create accounting ambiguity simply to achieve liquidity efficiency.
What Role Will the Custodian Play?
The custodian is likely to be central to implementation.
The proposed framework contemplates custodian-level controls and audit trails.
The custodian would need to identify relevant transactions and maintain records of:
- Outright purchases
- Outright sales
- Non-outright transactions
- Gross fund obligations
- Net fund obligations
- Securities obligations
- Settlement status
The custodian and AMC would also need to ensure that scheme-level segregation is preserved.
Therefore, implementation is not simply a matter of changing the mutual fund’s internal accounting software.
It would require coordinated changes across the settlement ecosystem.
What Role Could AMFI Play?
SEBI’s consultation paper proposes that AMFI, in consultation with custodians, recognised clearing corporations, recognised stock exchanges and other relevant stakeholders, may formulate implementation standards.
These standards could address practical matters such as:
- File formats
- Reporting requirements
- Confirmation timelines
- Settlement timelines
- Reconciliation
- Audit trails
- Rejected trades
- Unconfirmed trades
- Exception handling
This is important because a high-level regulatory permission is only the first step.
The industry also needs consistent operational standards so that different participants can implement the mechanism in a coordinated manner.
What Should AMCs and Compliance Teams Do Now?
Because the September 2026 document is a consultation paper, AMCs should not treat the proposal as an immediately operational requirement.
However, organisations can still use the consultation period to assess their readiness.
A useful internal review would include:
Review current settlement funding
Measure how much temporary liquidity is required because purchase and sale proceeds are settled separately.
Identify high-impact transaction days
Look specifically at:
- Index rebalancing
- Large subscriptions
- Large redemptions
- Portfolio restructuring
- Scheme mergers or other significant portfolio events
Review system capability
Check whether the trade-management, accounting and custodian interfaces can distinguish outright and non-outright transactions.
Test scheme-level controls
Ensure one scheme’s funds cannot accidentally be used for another scheme’s obligations.
Review reconciliation processes
Determine whether the proposed classification can be independently reconciled between AMC, broker, custodian and clearing records.
Evaluate audit requirements
Consider whether the existing system can retain a complete audit trail of the netting calculation.
Is This Already Applicable to Mutual Funds?
No.
This is one of the most important points for anyone reading the September 2026 development.
SEBI’s document dated 3 September 2026 is a consultation paper proposing a framework.
SEBI has invited comments from stakeholders and the public, with the stated deadline of 24 September 2026.
Therefore, AMCs, custodians and investors should not describe the proposal as a final operative entitlement unless and until SEBI issues the necessary final regulatory framework.
The draft circular included in the consultation paper also contains placeholders for implementation timing rather than a presently effective implementation date.
How Is This Different From the Earlier FPI Framework?
SEBI has already introduced a net-fund-settlement framework for certain outright transactions undertaken by Foreign Portfolio Investors (FPIs) in the cash market.
The mutual fund consultation paper follows a similar broad policy direction but proposes a framework specifically adapted to mutual fund schemes.
The mutual fund proposal retains safeguards concerning:
- Scheme-level accounting
- Delivery-based settlement
- Gross securities settlement
- Investor protection
- No cross-scheme netting
The existence of the FPI framework therefore provides useful context, but it does not mean mutual funds automatically have the same facility today.
What Does This Mean for Mutual Fund Investors?
For an ordinary mutual fund investor, the proposal is primarily an operational and regulatory development rather than a new tax rule.
Investors should not interpret the proposal as:
- A new mutual fund return mechanism
- A change in capital-gains taxation
- A change in NAV calculation rules
- Permission for mutual funds to trade without delivery
- Permission to transfer money between schemes
The proposal is intended to improve settlement efficiency while preserving scheme-level safeguards.
If implemented properly, the benefit would be largely behind the scenes.
A more efficient settlement mechanism can help the fund manage temporary liquidity requirements, but it does not change the investor’s basic ownership of units or the fundamental scheme-level accounting framework.
Frequently Asked Questions
What is SEBI’s September 2026 mutual fund net-settlement proposal?
SEBI has proposed allowing mutual fund schemes to net certain fund obligations arising from eligible outright cash-market transactions while continuing gross settlement of securities.
Is the proposal already a final rule?
No. As of 16 September 2026, it is a consultation proposal. SEBI invited comments up to 24 September 2026.
What is an outright transaction?
Under the proposal, it generally means either a purchase or a sale of a particular security during a settlement cycle, but not both.
Can a mutual fund net every purchase against every sale?
No. The proposal is limited to eligible outright transactions. A security involving both purchase and sale during the same settlement cycle would be treated as non-outright and excluded from netting.
Will securities also be net-settled?
No. The proposal concerns net settlement of funds. Securities would continue to be settled on a gross basis.
Can one mutual fund scheme use another scheme’s sale proceeds?
No. The proposal specifically contemplates netting only at the individual scheme level and does not permit cross-scheme netting.
Will STT and stamp duty disappear under the proposal?
No. SEBI’s consultation paper states that STT and stamp duty would continue to apply on a delivery basis, as applicable.
Why is SEBI considering the proposal?
The stated objectives include improving settlement efficiency, reducing temporary liquidity requirements and facilitating ease of doing business while retaining investor-protection safeguards.
When could the new framework become operational?
There is no final implementation date in the consultation proposal. Any effective date would depend on SEBI’s final decision and the subsequent regulatory/operational framework.
Key Takeaways
- SEBI issued a consultation paper on 3 September 2026 proposing net settlement of funds for certain mutual fund cash-market transactions.
- The proposal is not yet a final operative rule as of 16 September 2026.
- SEBI has invited comments until 24 September 2026.
- The proposal focuses on outright transactions.
- A security with both purchase and sale transactions in the same settlement cycle would be treated as non-outright.
- Netting would apply to fund obligations, not securities delivery.
- Securities would continue to be settled on a gross basis.
- Netting would be permitted only at the individual mutual fund scheme level.
- Cross-scheme adjustment would not be permitted.
- Scheme-wise accounting, NAV computation, segregation and investor-protection safeguards would continue.
- STT and stamp duty would continue to apply as prescribed.
- Custodians would have an important role in classification, reconciliation and audit trails.
- AMFI may develop detailed implementation standards in consultation with market participants if the framework is finalised.
- AMCs should assess their systems, liquidity data, reconciliation controls and scheme-level safeguards before implementation.
Conclusion
SEBI’s September 2026 proposal is a relatively technical change, but it addresses a very practical problem in the institutional investment ecosystem: the temporary liquidity requirement created when fund purchase and sale obligations have to be settled separately.
If the proposal is eventually implemented, eligible mutual fund schemes could potentially reduce temporary funding requirements by netting certain outright purchase and sale obligations.
At the same time, SEBI has deliberately kept the proposal narrow.
There is no proposal to introduce general trade netting, no cross-scheme adjustment, and no change to gross securities settlement. The framework is designed to improve cash settlement efficiency without disturbing scheme-wise accounting, delivery obligations, valuation or investor protection.
For AMCs, custodians and compliance teams, the real preparation should therefore focus on classification, reconciliation, system controls and audit trails.
For investors, the important point is simpler: this is currently a regulatory proposal, not a new rule that changes how mutual fund investors calculate returns or taxes.
The next important development will be SEBI’s consideration of stakeholder comments and any final framework or circular that may follow.
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