The Securities and Exchange Board of India (SEBI) is examining ways to change the system for setting prices for Exchange Traded Funds (ETFs). The main goal is to make sure the prices of ETFs on the stock market are closer to the actual value of the assets they hold. Current rules sometimes lead to significant differences, which can affect investors. This review aims to bring more accuracy and stability to ETF trading.
Background of ETF Pricing
ETFs are funds that trade on stock exchanges like regular stocks. Their prices can change throughout the trading day. To manage these fluctuations, regulators set price bands.
Current System: Most ETFs have a fixed price band of 20%. For overnight ETFs, this band is 5%. The base price used for this band is typically the Net Asset Value (NAV) from two days before the trading day (T-2 day).
Observed Issues: This older method can cause the ETF's market price to drift away from its true value, especially when significant events happen, such as stock splits or dividend payouts. This divergence can create risks for investors.
SEBI's Proposed Revisions
SEBI has put forward a proposal to update these pricing rules. The suggestions are part of a consultation paper released to gather feedback from market participants.
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Linking to Recent Data: A key change suggested is to use more recent data to set the base price. Options include:
The ETF's closing price from the previous trading day (T-1 day).
The average of the ETF's Indicative Net Asset Value (iNAV) over the last 30 minutes of the previous trading day.
The closing NAV of the previous trading day (T-1 day), where this data is available.
Dynamic Price Bands: SEBI is considering introducing different and adaptable price bands for various types of ETFs.
Overnight ETFs: These will continue to have a fixed 5% band.
Equity & Index ETFs: These could have an initial band of ±10%. This band might extend to ±20% after a 15-minute pause in trading. This flexibility is planned to allow for genuine market movements while preventing sharp, unexpected price swings. There would be a limit of two such adjustments per trading session.
Objective: The aim of these dynamic bands is to allow for flexibility while stopping abrupt price changes, mirroring similar systems already in place for stock and index derivatives.
Industry Feedback and Next Steps
Sources in the mutual fund industry have indicated that SEBI is reviewing the current methods for determining base prices and price bands. The regulator is actively engaging with exchanges and mutual fund companies to understand their views.
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Goals: The proposed changes are intended to:
Align ETF trading more closely with real-time market conditions.
Reduce pricing errors and risks for investors.
Provide a structured way to handle market volatility.
SEBI plans to consult further with stakeholders before finalizing any new guidelines.
Evidence and Sources
SEBI Consultation Paper: SEBI released a consultation paper on reviewing provisions related to base price and price bands for ETFs, inviting public comments. (Link: https://www.sebi.gov.in/reports-and-statistics/reports/feb-2026/consultation-paper-on-review-of-provisions-related-to-base-price-and-price-bands-for-exchange-traded-funds-etfs-99760.html)
Economic Times: Reported that SEBI plans to review the ETF pricing framework to curb divergence. (Link: https://economictimes.indiatimes.com/markets/stocks/news/sebi-to-review-etf-pricing-framework-to-curb-divergence/articleshow/128330589.cms)
Business Standard: Covered SEBI's proposal to overhaul the ETF price band framework, suggesting a link to T-1 data and dynamic bands. (Link: https://www.business-standard.com/markets/commodities/sebi-proposes-overhaul-of-etf-price-bands-1260213016261.html)
Impressive Times: Stated that SEBI is considering revisions to ETF trading rules to reduce risk and align with market conditions, including proposed tweaks to base price and price bands. (Link: https://impressivetimes.com/business/sebi-tweaks-etf-base-price-price-bands/)
NewsBytes: Noted SEBI's intention to introduce dynamic price bands for ETFs to achieve more accurate and stable prices. (Link: https://www.newsbytesapp.com/news/business/sebi-to-introduce-dynamic-price-bands-for-etfs/)
Taxmann: Published an analysis suggesting SEBI plans to link ETF prices to domestic market rates, highlighting how ETFs trade differently from traditional mutual funds. (Link: https://www.taxmann.com/post/blog/analysis-sebi-plans-to-link-etf-prices-to-domestic-market-rates?msockid=203c9c4f75fd6cb32eeb8b4f74396d29)
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