The framework does not take effect until 1 April 2027, and it changes only the settlement of funds, not of securities: securities will still settle on a gross basis, securities transaction tax and stamp duty will still apply on a delivery basis, netting will not be permitted across schemes, and derivatives, securities lending and borrowing, and short-sale-related transactions are excluded. Implementation standards are still to be formulated by AMFI, and asset management companies and custodians must jointly confirm system readiness before implementation.
- Issuer
- Securities and Exchange Board of India
- Act
- Framework for net settlement of funds for transactions undertaken by mutual fund schemes in cash market (SEBI Circular No. HO/24/13/(1)2026-IMD-POD-2/I/25242/2026)
- In force
- Status
- notified
- Outcome
- Circular No. HO/24/13/(1)2026-IMD-POD-2/I/25242/2026 dated 5 November 2026: net settlement of funds permitted for outright cash-market transactions by mutual fund schemes, at individual scheme level, within the same settlement cycle; in force 1 April 2027.
Mutual funds may net fund obligations for outright cash-market trades
The Securities and Exchange Board of India has permitted mutual fund schemes to settle their fund obligations on a net basis for outright transactions in the cash segment of stock exchanges, from 1 April 2027. The framework was issued by circular dated 5 November 2026, signed by Priyanka Mahapatra, General Manager, Investment Management Department.
The circular is addressed to all mutual funds, asset management companies, trustees and trustee companies, registered custodians, recognised clearing corporations and stock exchanges, registered stock brokers (through recognised stock exchanges), and the Association of Mutual Funds in India (AMFI).
The permission is limited in two important ways. First, netting is allowed only at the level of an individual mutual fund scheme and only within the same settlement cycle. Second, it covers funds only: settlement of the securities themselves will continue on a gross basis.
Gross settlement was the rule; FPIs got netting first
The circular starts from the existing position. SEBI's Master Circular for Stock Exchanges and Clearing Corporations, dated 30 December 2024, provides that no institutional investor may do day trading — that is, square off transactions intra-day — and that transactions by institutional investors in the cash market must be delivery-backed and settled on a gross basis at the custodian or client level.
SEBI had already moved away from gross settlement of funds for one class of institutional investor. By a circular dated 24 April 2026, it permitted net settlement of funds for outright transactions undertaken by Foreign Portfolio Investors in the cash market, while retaining gross settlement of securities, with implementation by 31 December 2026.
The new circular extends the same facility to mutual fund schemes, stating the object as enhancing operational efficiency, reducing temporary funding requirements, and improving settlement efficiency for mutual fund schemes.
Only outright transactions, only within one scheme
The circular defines an “outright transaction” as either a purchase transaction or a sale transaction, but not both, in a security in the same settlement cycle undertaken by a mutual fund scheme. Where a scheme has both purchase and sale transactions in the same security within the same settlement cycle, those transactions are treated as non-outright for that cycle and are not eligible for net settlement of funds.
Netting is permitted only within the same mutual fund scheme and within the same settlement cycle. No netting is permitted across different schemes of the same mutual fund, and no adjustment of obligations is permitted between two or more schemes or portfolios. The asset management company and the custodian must ensure that the netting mechanism does not affect scheme-wise accounting, net asset value computation, asset allocation, investment limits, or unit-holder interest.
The framework does not apply to derivative transactions, securities lending and borrowing transactions, short-sale-related transactions, or any other transaction not expressly covered by the circular.
Residual obligations stay gross; the annexure shows the saving
The circular deals expressly with what happens when outright purchases and outright sales do not match. If the value of outright sale transactions is less than the value of outright purchase transactions, the residual fund obligation must be funded by the concerned mutual fund scheme. If outright sale proceeds exceed outright purchase obligations, the excess may not be adjusted against non-outright purchase obligations, which must continue to be funded separately on a gross basis.
Securities settlement, securities transaction tax and stamp duty are all untouched by the change. Settlement of securities will continue on a gross basis between the mutual fund scheme and the custodian, securities transaction tax and stamp duty will continue to be charged on a delivery basis, and the circular states that the netting will not alter the delivery-backed nature of institutional trades in the cash market.
The annexure to the circular illustrates the effect with a single scheme's trades on one day: security A bought for ₹1,000 (an outright purchase), security B bought for ₹1,000 and sold for ₹2,000 (a non-outright pair, excluded from netting), and security C sold for ₹2,000 (an outright sale). Under gross settlement the scheme pays in ₹2,000 and receives ₹4,000; under net settlement of the outright legs it pays in ₹1,000 and receives ₹3,000, while the obligations for security B continue to be settled on a gross basis.
Systems, audit trails, and AMFI standards before go-live
The circular imposes operational safeguards. Asset management companies and custodians must ensure adequate systems and controls for scheme-wise identification of outright purchase and sale transactions, non-outright transactions, gross and net fund obligations, and securities pay-in and pay-out obligations. The custodian must maintain a clear audit trail of gross obligations, netted fund obligations, and excluded non-outright transactions, and must ensure that no cross-scheme adjustment or inter-scheme funding takes place. Trustees must review implementation and ensure it is in the interest of unit-holders.
Implementation standards are to be formulated by AMFI in consultation with recognised clearing corporations, recognised stock exchanges, custodians, and other relevant stakeholders. Those standards must cover file formats and reporting, timelines for confirmation and settlement, the reconciliation mechanism, audit trail requirements, treatment of rejected, unconfirmed or modified trades, cut-off timelines and exception handling, and the methodology for determining the same settlement cycle. Clearing corporations and stock exchanges must adapt their systems and reporting, and asset management companies and custodians must jointly confirm system readiness before implementation.
BANTHRY ANALYSISAnalysis: a funding saving, not a settlement revolution
The circular's practical effect is narrower than the headline suggests, and that narrowness is deliberate. By netting only the fund legs of outright transactions, SEBI reduces the temporary cash a scheme must hold for settlement — in the annexure's illustration, the pay-in falls from ₹2,000 to ₹1,000 — without touching the delivery-backed structure of institutional trading. Securities still move gross, taxes still apply on delivery, and anything that is not a clean one-way trade stays outside the framework.
The two guardrails that matter most are the scheme-level limit and the outright-transaction definition. Confining netting to a single scheme prevents one scheme's trades from funding another scheme's obligations, which would blur scheme-wise accounting and unit-holder interests. Excluding buy-and-sell pairs in the same security in the same cycle prevents the framework from being used to net what is, in substance, a squared-off position — the very day trading the 2024 Master Circular prohibits for institutional investors.
The 1 April 2027 commencement date, nearly five months after the circular, reflects the work still to be done: AMFI's implementation standards, systems changes at custodians, exchanges, and clearing corporations, and a joint readiness confirmation. Until those land, the framework is a notified rule with no live effect.
BANTHRY ANALYSISFor law students
This circular is a useful study in how a regulator changes a market practice without changing the underlying legal structure. The delivery-backed, gross-settlement regime for institutional trades stays exactly as it was; only the cash funding mechanics for one defined class of trades are netted. When you read a circular, always ask what it leaves unchanged — here, paragraphs 9 and 16 do that work explicitly.
The definition in paragraph 4 does the heavy lifting. “Outright transaction” looks like a label, but it is a test: one direction only, in one security, in one settlement cycle. Any trade that fails the test is non-outright and stays gross. Exam questions on this circular will almost certainly turn on applying that test to a set of trades, as the annexure does.
Finally, note the source of power. Paragraph 17 states the circular is issued under section 11(1) of the SEBI Act, 1992, read with Regulation 84 of the SEBI (Mutual Funds) Regulations, 2026. That pairing — the Board's general power to protect investors and regulate the market, plus the specific regulation-making power for mutual funds — is the standard anchor for SEBI circulars, and it is worth memorising.
READING PROMPTSQuestions for a closer reading
- A mutual fund scheme buys and sells the same security in the same settlement cycle. Is that pair of transactions eligible for net settlement of funds under this circular, and which paragraph decides the answer?
- Under the circular, a scheme's outright sale proceeds in a settlement cycle exceed its outright purchase obligations. Can the excess be used to fund the scheme's non-outright purchase obligations? What does the circular require instead?
- Netting is permitted only within the same scheme and the same settlement cycle. What would change, in practical terms, if netting were permitted across different schemes of the same mutual fund — and why does the circular prohibit it?
