Until 3 August 2026, the closing price of an Indian stock was its volume-weighted average price (VWAP) over the last 30 minutes of continuous trading - an average, deliberately smoothed to resist being pushed around by any single order. SEBI’s 16 January 2026 circular replaced that, for stocks with active F&O contracts, with a Closing Auction Session (CAS): a 20-minute call auction (3:15-3:35 PM) that collects buy and sell orders and clears them at one equilibrium price, rather than averaging a trading window.
That one design change lands on mutual funds in two opposite directions, according to a report from Invesco Mutual Fund published after the rollout.
- ETFs and index funds - helped. A single equilibrium price, discovered in a dedicated auction, is harder for a large last-minute order to nudge than a 30-minute average was. Because ETF and index fund NAVs are built from that same closing print, and index providers benefit from a cleaner clearing price, CAS is expected to reduce ETF tracking error.
- Arbitrage funds - squeezed. The strategy holds a stock and an equivalent short futures position, expecting the two to converge by expiry; NAV is set from the closing price of the cash leg. Invesco’s report finds the cash-futures spread stays stable for most of the trading day but can widen significantly in the final trading hour - the exact window CAS now uses to set the print the strategy’s convergence depends on.
The same design choice explains both outcomes. Concentrating price discovery into one short, single-clearing auction is precisely what a passive, index-tracking product wants - one clean number, resistant to being walked by a single large order. It is precisely what an arbitrage strategy doesn’t want at the one moment its whole trade needs to resolve: a position built on two prices converging is now converging through a shorter, more concentrated pricing window than the 30-minute average it replaced, and Invesco’s finding is that the divergence shows up exactly there.
The controversy compounds because CAS’s closing price doesn’t just set fund NAVs - it also became the basis for derivative contract settlement prices at expiry. Traders and brokers flagged, almost as soon as CAS went live in August, that a price set in a 20-minute auction is more exposed to last-minute order imbalances than the old 30-minute average was, with direct consequences for F&O expiry payouts. On 4 September 2026, SEBI announced it would review the derivative settlement price methodology in response, with a consultation paper expected within about a week.
Equity Savings schemes - the SEBI hybrid sub-category that runs a meaningful arbitrage book alongside its unhedged equity and debt - plausibly carry some of this same exposure by construction, though that specific read isn’t something the reporting so far has confirmed; take it as an inference, not a reported finding. What is confirmed is that this is unresolved: SEBI’s review was only announced this week, the consultation paper hasn’t been published yet, and whatever settlement-price fix follows could still change how much of this actually reaches arbitrage fund investors.
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