SEBI lets arbitrage funds hold up to 1% unhedged to boost closing auction liquidity

SEBI has permitted arbitrage mutual funds to temporarily carry unhedged positions equal to up to 1% of their plan size. The change is intended to pull more liquidity into the closing auction session, which has been weak in recent weeks. The allowance was revealed by people familiar with the matter who asked to stay anonymous because the details are not public. Funds can keep the unhedged exposure only for a short period before they must rebalance. At the end of August, arbitrage funds together held about ₹3 lakh crore (roughly $31 billion) in assets, making them a sizable source of market liquidity. By giving these funds extra flexibility, SEBI hopes they will step in at the end of the trading day and support price discovery for stocks. Arbitrage funds normally act as liquidity providers by buying and selling shares to exploit price gaps, so their participation can smooth volatile closing prices. The regulator has not issued an official press release yet, but sources say the temporary rule will be reviewed once the closing auction shows improvement. No other risk‑limit changes for the funds were announced, and the move forms part of SEBI’s broader effort to strengthen market functioning.