SEBI Defends Closing Auction Transition, Says New System Will Improve Price Discovery & Market Consistency

Mumbai: The Securities and Exchange Board of India (SEBI) has defended the introduction of the Closing Auction Session (CAS) amid concerns over differences in closing prices across domestic stock indices.

In its annual report, SEBI said the transition represents a significant step towards ensuring cross-market consistency and strengthening India’s price discovery mechanism.

Phased Introduction

The dedicated 20-minute closing auction for the equity cash segment was introduced in phases from August 3, 2026.

SEBI said the framework was designed to align India’s closing-price determination process with practices followed in major international markets. It also aims to provide fair, equal and transparent access to every category of investor.

Passive Investing Expands

The regulator highlighted the rapid expansion of passive investing in India. Passive funds accounted for nearly 30 percent of foreign portfolio investors’ equity assets under management and 28 percent of domestic mutual funds’ equity assets as of March 31, 2026.

Indian stocks also carry weights ranging from 12 percent to 30 percent in international indices, including MSCI and FTSE.

This has increased demand for accurate execution at closing prices, particularly during index rebalancing, when fund managers seek to minimise tracking errors.

VWAP Limitations

Previously, closing prices were determined using the volume-weighted average price of trades conducted during the final 30 minutes of regular trading.

SEBI said this methodology could contribute to price swings and volatility when markets were required to absorb large institutional orders in real time.

How CAS Works?

CAS brings buy and sell orders into a single, transparent auction. All orders interact simultaneously, allowing exchanges to determine an equilibrium price through the maximum matching of demand and supply.

According to SEBI, this can reduce price disruption, improve execution certainty and produce more stable closing prices during periods of heavy trading.

The system reflects practices followed by leading exchanges such as the NYSE, London Stock Exchange and Hong Kong Exchanges.

Divergence Fuels Debate

However, sharp differences in benchmark and individual stock closing prices following CAS implementation have confused investors and triggered questions over end-of-day price reliability.

SEBI maintains that the transition will ultimately improve transparency and strengthen the overall closing-price discovery process.