Is Arbitrage Legal: Understanding the Basics | Motilal Oswal

Is Arbitrage Legal: Understanding the Basics

Is Arbitrage Legal?

The concept of arbitrage has long fascinated investors worldwide. But when it comes to the Indian stock market, is it a legally viable strategy to pursue? Before we explore its legality, let's clarify what arbitrage means. Arbitrage is the practice of exploiting price discrepancies of the same asset on different markets to make a profit. In the stock market, this often involves buying low in one market and selling high in another.

Arbitrage in Indian Stock Market: Is It Permissible?

The legality of arbitrage in the Indian stock market primarily depends on the nature of the arbitrage and the rules set by regulatory authorities like the Securities and Exchange Board of India (SEBI).

Open Your free Demat Account in just 5 minutes!

1. Inter-Exchange Arbitrage

Inter-exchange arbitrage, where traders exploit price differences on different stock exchanges, is generally legal in India. SEBI permits this form of arbitrage as long as traders adhere to the regulations set by the respective exchanges.

2. Cash-Futures Arbitrage

Cash-futures arbitrage involves buying stocks in the cash market and selling equivalent futures contracts. This type of arbitrage is also legal in India, subject to SEBI's regulations.

3. Cross-Border Arbitrage

Cross-border arbitrage, where investors capitalize on price disparities between the Indian stock market and international markets, is legal but subject to specific regulations. RBI (Reserve Bank of India) and SEBI have laid down guidelines to govern such transactions.

4. Insider Trading and Manipulation

Arbitrage becomes illegal when it involves insider trading or market manipulation. Traders must avoid using non-public information to gain an unfair advantage, as this is strictly prohibited.

5. Tax Considerations

While arbitrage itself is legal, traders should be aware of tax implications. Profits from arbitrage are taxable under Indian tax laws, so investors must fulfil their tax obligations.

What is Compliance and Regulatory Oversight for Arbitrage?

SEBI plays a pivotal role in regulating arbitrage activities in the Indian stock market. Traders and investors must comply with SEBI's guidelines to ensure their arbitrage activities remain legal and transparent. Here's a breakdown of what this subheading entails:

  • Compliance: 

This aspect emphasises the importance of following all the applicable laws, regulations, and ethical standards while engaging in arbitrage activities. Compliance entails conducting trades and transactions in a manner that aligns with the established legal framework and market rules.

  • Regulatory Oversight: 

This term signifies the supervisory role played by regulatory authorities, such as SEBI, in monitoring and controlling arbitrage activities within the Indian stock market. Regulatory oversight involves setting guidelines, enforcing rules, and ensuring fair and transparent market practices.

The Bottom Line

Arbitrage in the Indian stock market is generally legal, provided traders adhere to the specific rules and regulations set by SEBI and other authorities. Investors should consider tax implications and avoid any unethical practices to ensure it is a legitimate and profitable investment strategy.


Related Articles: What is Risk Tolerance in Bond Market | What is Cross Trade | What are the Types of FDI


Popular Stocks: ONGC Share Price | SBI Life Share Price | UPL Share Price | TCS Share Price | Titan Share Price

  • Open your FREE Demat Account in 5 Minutes
Select State
Select City
By submitting your details, you are authorising us to call you or send promotional communication even though you may be registered under DND