SEBI Proposes Net Settlement For Mutual Fund Schemes

The Securities and Exchange Board of India (SEBI) has proposed permitting net settlement of funds for transactions undertaken by mutual fund schemes in the cash market. This proposal is intended to facilitate ease of doing business, improve settlement efficiency, and reduce temporary liquidity requirements for mutual fund schemes.

According to SEBI, the proposal is a response to representations from market participants, who highlighted that mutual fund schemes may face temporary liquidity requirements and operational inefficiencies due to the current gross settlement system. The issue is particularly pronounced during index rebalancing, which requires portfolio changes in passive funds and large investor subscriptions or redemptions.

SEBI has proposed to permit net settlement of funds for outright buy or sell transactions undertaken by a mutual fund scheme in the cash market, executed on a recognised stock exchange. The net settlement of funds will be allowed only at the level of an individual mutual fund scheme, and no netting will be permitted across different schemes of the same mutual fund.

The asset management company (AMC) and custodian will be responsible for ensuring that the proposed framework does not affect scheme-wise accounting, valuation, daily NAV computation, segregation of securities and funds, or unit-holder interest. In cases where the value of outright sale transactions is less than the value of outright purchase transactions, the residual amount will be funded by the concerned mutual fund scheme.

The proposal also outlines the treatment of purchase and sale obligations. If the value of outright sale transactions exceeds the value of outright purchase transactions, the excess amount will not be adjusted against purchase obligations arising from non-outright transactions.

SEBI has proposed that the Association of Mutual Funds in India (AMFI) should formulate implementation standards in consultation with custodians, recognised clearing corporations, recognised stock exchanges, and other relevant stakeholders. The implementation standards will cover aspects such as treatment of partially confirmed or rejected trades, file formats and reporting, and reconciliation processes.

The proposal is seen as a positive step towards improving the efficiency of the mutual fund industry. By allowing net settlement of funds, SEBI aims to reduce the temporary liquidity requirements of mutual fund schemes, making it easier for them to manage their cash flows.

The move is also expected to improve the overall settlement efficiency of the cash market. By reducing the need for gross settlement, the proposal is likely to decrease the operational inefficiencies faced by mutual fund schemes.

In recent times, SEBI has taken several steps to improve the functioning of the mutual fund industry. The regulator has allowed the net settlement of funds framework for Foreign Portfolio Investors (FPIs) and has also approved IPO plans of several companies.

The proposal is currently open for public consultation, and stakeholders can submit their comments and suggestions to SEBI. The final guidelines will be issued after considering the feedback received from the market participants.

The proposal is a significant development in the mutual fund industry, and its implementation is expected to have a positive impact on the industry. By improving settlement efficiency and reducing temporary liquidity requirements, SEBI aims to make it easier for mutual fund schemes to operate and manage their cash flows.

In conclusion, the proposal by SEBI to permit net settlement of funds for mutual fund schemes is a welcome move. It is expected to improve the efficiency of the mutual fund industry and reduce the operational inefficiencies faced by mutual fund schemes. The proposal is a significant step towards improving the overall functioning of the cash market and is likely to have a positive impact on the industry.