The Securities and Exchange Board of India issued a circular revising the Closing Auction Session. From December 7, expiring index and stock derivatives will settle at the Volume Weighted Average Price. SEBI listened to the derivatives market, but now many experts say the regulator needs to hear the passive investor.
The Securities and Exchange Board of India (SEBI) recently issued a circular revising the Closing Auction Session (CAS). This comes 10 weeks after the auction went live on August 3 and follows a consultation paper published in September. The circular’s message is simple: SEBI has listened to the derivatives market.
From December 7, expiring index and stock derivatives will settle at the Volume Weighted Average Price (VWAP) over the final 30 minutes of continuous trading, instead of the auction price.
Exchanges will publish the indicative index value live during that period, and futures and options will remain open until 3:45 p.m. For derivative players and Foreign Portfolio Investors (FPIs) bringing collateral into India to trade them, this means a steadier, more predictable settlement price.
The derivatives market has had its say. Now it’s time to hear the passive investor’s voice.
A passive fund doesn’t aim to beat the market; it tracks an index. Each evening, it values its portfolio at the closing price, and whenever the index is rebalanced, it trades at the close.
For this kind of fund, the closing auction isn’t just another trading session — it’s where investors’ money meets the market. With settlement now moved out, CAS can become what it was designed to be: the day’s most trusted price.
This is where the auction ties into Viksit Bharat. A developed India by 2047 will need a deep pool of patient domestic capital. It can come from households shifting savings from gold and fixed deposits, as well as from pension funds investing over decades. An index fund is the simplest vehicle for both. Passive funds already account for 18.6 per cent of India’s mutual fund assets, up from 9.8 per cent in 2021. The figure is 55 per cent in the United States and about 37 per cent in Japan. As India moves towards those levels, more money will need to trade at the close. This kind of patient capital steadies prices when foreign investors sell, lowers Indian companies’ cost of capital, and funds the investment growth requires.
For that money to come in, the closing auction must be deep on both sides every day. Three steps can help.
Three steps
The first is an imbalance-only order. When index funds all need to buy at the close, the auction can become sharply one-sided. Markets such as New York and Nasdaq address this with an order that trades only against the published imbalance, and only at or better than the auction price. It cannot move the price; it can only absorb the excess. This is a natural fit for derivative players. An arbitrageur can offset a buy imbalance in the auction and hedge the position in futures, which now remain open until 3:45 p.m. SEBI’s timing change makes this order more useful. In turn, the derivatives market that SEBI has just accommodated can become the auction’s shock absorber.
The second option is to build a stronger short side through the Securities Lending and Borrowing Mechanism (SLBM). An imbalance-only seller needs stock to sell, but most liquidity providers do not hold large inventories of every index stock. They therefore need to borrow shares. India’s lending market remains small compared with its cash and derivatives markets. Wider access for lenders such as mutual funds and insurers, simpler tax treatment of lending fees, and longer lending tenures would enable sellers to participate in the auction whenever buyers crowd in.
The third is a fresh look at the Securities Transaction Tax (STT). At 0.1 per cent per side, it taxes turnover rather than profit. An index fund rebalancing earns nothing from the trade but pays twice. An arbitrageur, short seller or market maker who absorbs an imbalance earns a few basis points yet pays 20. When the tax exceeds the reward, liquidity providers stay away. Imbalances then widen, closing prices drift, and savers bear the cost.
For a liquidity provider, if permitted, the math is even more stark. Absorbing an imbalance earns a thin margin — often just a few basis points — while a 20-basis-point round-trip STT can erase it. The provider then stays away, leaving the auction without the counterparty it needs.
The logic behind STT also deserves a closer look. Introduced in 2004, it replaced the tax on long-term capital gains from listed shares, which were exempted at the same time. That exemption ended in 2018, and long-term gains are taxed again today. The original rationale for STT — a simple levy in place of a capital gains tax — therefore no longer applies to delivery trades. Investors now pay both. A significant reduction, or an exemption for trades executed in the closing auction by index funds and registered liquidity providers, would restore balance. The revenue forgone would be small, while the gains in market depth, fairer closing prices, and lower costs for savers would be substantial.
Taken together, these steps would complete what the recent circular set in motion. SEBI has brought greater clarity to derivatives settlement. An imbalance-only order, a deeper lending market, and lighter STT would give passive investors a deeper close.
The closing price is the one price shared by every investor in India. As passive money grows, it will carry the savings of a nation aiming to become developed by 2047. It deserves an auction designed for that future.