Nilesh Shah: Closing Auction Session Needs Tweaks for Funds

Nilesh Shah, Managing Director and Chief Executive Officer of Kotak Asset Management Company, believes the Closing Auction Session (CAS) mechanism is largely effective but requires further refinement. He noted its role in curbing unhealthy market activities and aligning Indian markets with global standards.

Shah stressed the continuous need for regulatory vigilance to prevent market participants from manipulating closing prices. He acknowledged that the introduction of CAS would naturally impact overall market volumes.

Industry Pitches CAS Enhancements

The mutual fund industry has submitted several recommendations to improve the CAS, particularly for passive funds and investors focused on minimizing tracking errors. Key suggestions include:

• Addressing volatility in net asset values and spreads for arbitrage funds.
• Granting mutual funds more flexibility in their participation, acknowledging both active and passive strategies.

Volatility in arbitrage funds stems from a timing mismatch: futures prices are determined at 3:40 p.m., while cash prices are settled earlier at 3:30 p.m. through the closing auction. To mitigate this uncertainty for arbitrage fund investors, the industry proposes a specific calculation method.

• Calculate a theoretical futures price.
• Use the actual spread traded during a defined window.
• Apply this theoretical price to the closing auction price.

The proposed trading window for spread calculation is either between 2:45 p.m. and 3:15 p.m., or 3 p.m. and 3:15 p.m.

Navigating Implementation Challenges

Regarding concerns about the CAS implementation timeline, Nilesh Shah commented that change is inherently difficult, often leading to criticism for regulators introducing new market mechanisms. He deemed the timing acceptable, stating it was “better late than never.”

Shah reiterated that the closing auction plays a vital role in integrating Indian markets with international practices. He concluded that while CAS is now operational, continuous regulatory oversight and industry feedback will be essential for its ongoing refinement and market progression.