Capital markets regulator Sebi has proposed changes to how exchange-traded funds determine their base price and daily trading limits, aiming to better align ETF price movements with their underlying assets and reduce operational risks.
In a consultation paper issued on February 13, the regulator said it is reviewing the provisions related to base price and price bands for ETFs and has invited public comments by March 6. ETFs, which mirror indices or commodities such as gold and silver, are traded on stock exchanges like individual shares.
Currently, exchanges apply a fixed price band of up to 20% on the base price of ETFs, except for Overnight ETFs investing in TREPs, which have a tighter 5% band.
The key issue Sebi has flagged is the method used to determine the base price for applying these price bands. At present, exchanges use the T-2 day closing net asset value to calculate the base price for ETFs, unlike individual stocks and indices, where T-1 closing prices are used.
This creates a one-day lag. Since ETF NAVs typically change between T-1 and T-2, using T-2 NAV as the reference can mean that price bands are anchored to an outdated value. Sebi noted that this lag may not reflect the most recent market conditions.
There is also a manual element in the current system. Corporate actions such as dividends and bonuses effective on T-1 are adjusted manually in the T-2 NAV for base price calculation, increasing the risk of errors or omissions.
To address this, Sebi said that, based on deliberations with stock exchanges and its Secondary Market Advisory Committee, the base price for ETFs on T day could be revised. The proposed options include using the closing price of the ETF on T-1 day, defined as the weighted average traded price of the last 30 minutes; the average indicative NAV of the last 30 minutes on T-1; or the closing NAV of T-1 day, if available.
The regulator has sought feedback on which of these should be adopted. Sebi has also proposed changes to the price band framework itself.
Based on data analysis for the period April 1, 2025, to December 31, 2025, it was observed that in more than 99.8% of equity and debt ETFs, the maximum single-day movement was within 10%. For commodity ETFs, over 98% of cases saw movement within 9%, while Overnight ETFs saw movements between minus 5% and plus 5%.
However, during periods of high volatility, such as in the last week of January 2026 for gold and silver, the existing bands based on T-2 NAV were found to be inadequate to keep ETF prices aligned with underlying assets.
In response, Sebi has proposed a more dynamic price band structure. For equity and debt index ETFs, the proposal is to introduce an initial price band of 10%, which can be extended up to 20% during the trading day, subject to a cooling-off period and certain trading conditions. There can be a maximum of two such relaxations in a day, with an overall cap of 20% single-day movement.
For gold and silver ETFs, the initial band would be 6%, which can be gradually expanded in stages of 3% after a cooling-off period, up to a maximum of 20%. If international price movements exceed the aggregate daily price limit of 9% applicable to commodity derivatives, exchanges may relax the band further in stages.
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For Overnight ETFs, the existing 5% price band would continue. Sebi has asked whether the current upper limit of 20% for commodity ETFs should be removed to align with daily price limits applicable to gold and silver derivative contracts.
It has also sought views on whether a separate pre-open session should be introduced for commodity ETFs, given that gold and silver trade across global markets beyond Indian trading hours.
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