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A SEBI circular of 5 November lets each mutual fund scheme settle funds on a net basis for outright purchases and sales in the cash market from 1 April 2027. Securities stay gross, cross-scheme netting is barred and STT is unchanged. In SEBI's example, pay-in and pay-out each fall by Rs 1,000.

The Securities and Exchange Board of India on 5 November 2026 issued a framework that will let mutual fund schemes settle their cash market trades on a net basis for funds, while securities continue to move on a gross basis. Circular HO/24/13/(1)2026-IMD-POD-2/I/25242/2026 comes into force on 1 April 2027. SEBI says the aim is to improve operational efficiency, reduce temporary funding requirements and improve settlement efficiency for schemes.
This is plumbing, not a headline product change. Yet plumbing is what lets a fund meet redemptions, stay fully invested and avoid idle cash, so it is worth understanding.
Institutional investors in India cannot day trade. Their cash market trades must be delivery-backed and settled gross at the custodian or client level. If a scheme buys one share and sells another on the same day, it has to fund the purchase in full on the pay-in date, even though sale proceeds are arriving at about the same time.
That creates a temporary need for money. It may not sound large in a single trade, but a big equity scheme can have many purchases and sales each day. The result is that cash must be set aside or arranged just to bridge timing. SEBI took the same step for Foreign Portfolio Investors in a circular of 24 April 2026, to be implemented by 31 December 2026. Mutual funds are now getting similar treatment.
The key term is "outright transaction". It means either a purchase or a sale of a security in the same settlement cycle by a scheme, but not both. If a scheme both buys and sells the same security in a cycle, those trades are non-outright and stay outside netting.
SEBI's circular includes a worked example.
| Security | Bought (Rs) | Sold (Rs) | Treatment |
|---|---|---|---|
| A | 1,000 | Nil | Outright purchase |
| B | 1,000 | 2,000 | Non-outright |
| C | Nil | 2,000 | Outright sale |
Under today's gross settlement, the scheme pays in Rs 2,000 and receives Rs 4,000. Under the new system, the outright purchase in A is netted against the outright sale in C. Security B stays gross. The scheme pays in Rs 1,000 and receives Rs 3,000. The final position is the same, a net receipt of Rs 2,000, but the amount that has to be found on the day has been halved.
The rules on what happens when one side is larger are specific. If outright sales are smaller than outright purchases, the scheme funds the residual. If outright sales are larger, the excess cannot be used against non-outright purchases, and those purchases are funded separately on a gross basis.
The framework does not cover derivatives, securities lending and borrowing, short sale-related transactions or anything not expressly mentioned.
The most important rule is that netting happens only within a single scheme and a single settlement cycle. No netting is allowed across schemes of the same fund house, and no obligation can be adjusted between two schemes or portfolios. This is about protecting unit-holders. Each scheme's money belongs to its own investors, and one scheme must not quietly finance another.
AMCs and custodians must ensure that netting does not affect scheme-wise accounting, NAV computation, asset allocation, investment limits or unit-holder interest. Custodians must keep a clear audit trail of gross obligations, netted obligations and excluded trades. Trustees must review implementation and confirm that it is in the interest of unit-holders.
Several things do not change. Securities settlement stays gross between the scheme and the custodian. Securities Transaction Tax and stamp duty are still charged on a delivery basis. Trades remain delivery-backed, and the manner of settlement between custodians and clearing corporations stays the same.
For an ordinary investor, nothing changes on a statement. Units, NAV and tax remain as they are. The benefit is indirect. A scheme that needs less money set aside for settlement timing can, in principle, run with less idle cash, and that should help slightly with costs and returns. SEBI's circular does not quantify the saving, and readers should be wary of anyone who does.
For fund houses and custodians, there is real work to do. Systems must identify outright and non-outright trades for each scheme, every cycle. AMFI will write implementation standards with clearing corporations, exchanges and custodians, covering file formats, confirmation timelines, reconciliation, audit trails, how rejected or modified trades are handled and how to treat variations in settlement cycles. AMCs and custodians must jointly confirm readiness before going live.
The change also narrows a gap between two kinds of institutional investor. Foreign portfolio investors were given this facility first, and domestic fund houses, which now hold a very large share of Indian equities, would otherwise have been left on a less efficient system.
There is a risk argument too. Critics of netting point out that it adds a new layer of operational logic, and that a trade rejected late can upset a calculated net position. However, SEBI has kept the changes narrow, kept clearing corporation settlement untouched and required the standards to deal with exactly that case.
The long lead time, until April 2027, gives the industry about five months to build. The main thing to watch is the AMFI standards, which will set the practical rules. The foreign investor version, due by the end of December 2026, will also serve as an early test of how the industry copes.
This article is for information and is not investment advice.
Sources
About the Author
Staff Writer
Prateek Rawat is a contributor to Wirony. All articles published under this byline undergo editorial review and approval before publication, with any necessary corrections handled…
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