SEBI has relaxed rules for arbitrage mutual funds, allowing them to carry up to 1% unhedged positions. This change applies to funds managing nearly ₹3 lakh crore. The move is aimed at improving liquidity in the closing auction session, which has struggled with low participation since its launch in August.
Arbitrage funds earlier had to remain fully hedged, limiting their ability to participate when mismatches occurred between cash and futures markets. The new flexibility permits them to carry small mismatches instead of being forced to hedge immediately. This is expected to encourage more participation and stabilize end-of-day pricing.
The regulator has also proposed wider changes to strengthen the auction framework, including possible adjustments to settlement methods on expiry days. Asset managers may need to inform investors about the relaxation.
The closing auction session was introduced to improve price discovery but faced thin volumes and volatility. By easing rules, SEBI hopes to attract institutional investors back into the process.
This step balances risk management with liquidity needs, aiming to boost confidence in India’s market infrastructure. Improved participation from arbitrage funds could reduce volatility and enhance stability in final trades, supporting smoother functioning of the equity markets.
