Capital market regulator Sebi is reviewing the framework for determining base prices and price bands for exchange traded funds (ETFs), to bring them in line with real-time market and reduce risks related to price adjustments, people familiar with the development told Moneycontrol on condition of anonymity.
As per sources within the mutual fund industry, the regulator is considering tweaking the current methodology that uses T-2-day Net Asset Value (NAV) to a more updated T-1-day NAV (Previous Day). In the current methodology, there is one-day lag between the ETF's actual NAV and the price band applied. On top of it, corporate actions such as stock splits or dividends require manual adjustments, increasing the risk of errors or missed updates.
What’s the Proposal?
Base Price Change: Sebi, after consultation with exchanges and mutual fund industry, is planning to tweak the base price calculation and price bands. For base price calculation, Sebi’s view is that instead of using T-2-day NAV, the base price should be based on previous day’s NAV, since the NAVs are published by 11 PM, well-before next day’s market opening.
Dynamic Price Bands: The regulator is also discussing modifying existing uniform plus and minus 20 percent price band, along with a more calibrated limit and dynamic flexing system.
Equity & Index ETFs: The initial price band of plus and minus 10 percent is proposed, which can be extended to plus and minus 20 percent price during the day. This ‘flexing’ will occur after a 15-minute cooling-off period, which will be only 5 minutes if undertaken within the last 30 minutes of a trading session. A maximum of two flexing events in a session is being proposed.
Commodity ETFs: The proposal is for an initial band of plus and minus 6 percent, with further relaxations in stages of 3 percent after cooling-off periods if international market movements warrant it, up to a total limit of plus and minus 20 percent.
Liquid and Overnight ETFs: Fixed price band of plus and minus 5 percent is being proposed, considering their low volatility.
This dynamic system aims to prevent abrupt price swings while providing flexibility for genuine market movements.
How Will the Tweaks Help?
If implemented, the revised system will align ETF trading with real-time market conditions, reduce the risk of pricing errors, and introduce a structured mechanism to handle volatility. It also brings ETFs closer to the practices followed for index and equity derivatives, which already operate under dynamic circuit breakers.
Why the Changes?
ETFs, like individual stocks, are traded on stock exchanges and are currently subject to a fixed price band of plus and minus 20 percent based on their base price. This base price is derived from the closing NAV of T-2 day, as downloaded from the Association of Mutual Funds in India (AMFI) website. Sebi noted that this practice results in a one-day lag between the ETF's actual NAV and the price band applied. Also, corporate actions such as splits or dividends require manual adjustments, increasing the risk of errors or missed updates.
Feedback from industry has indicated that the fixed plus and minus 20 percent price band may not accurately reflect the price movements of underlying securities, especially in volatile segments like commodities or index-based ETFs.
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As per industry sources, an analysis of ETF price variations between April 2024 and March 2025 revealed that in more than 99.5 percent of cases, ETFs moved within plus and minus 10 percent of their previous close. For liquid and overnight ETFs, fluctuations were mostly within plus and minus 5 percent. In commodities, extreme moves were observed in rare cases, but the maximum variation generally stayed below plus and minus 20 percent. Based on the study, Sebi has proposed the introduction of narrower initial bands with the option to expand when required.
An email seeking comments on the proposal did not elicit any response. The proposals are expected to undergo further stakeholder consultations before Sebi issues final guidelines, it is learnt.
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