SEBI revamps ETF trading framework with dynamic price bands

Sebi said stock exchanges and mutual fund houses should jointly address operational challenges to enable the use of T-1 closing NAV as the base price from 1 April 2027.(Bloomberg)AI Quick ReadThe Securities and Exchange Board of India (Sebi) has revised the rules governing how exchange-traded funds (ETFs) are priced and traded, including base prices, daily price limits, pre-open auctions and settlement of failed trades, to ensure ETF prices better reflect the value of their underlying assets.

In a consultation paper issued on Monday, the market regulator said the move was triggered by concerns that the current ETF framework uses a reference price with a one-day lag and fixed price bands that may not align with movements in value of the assets they track.

Currently, equity, debt and commodity ETFs are subject to a fixed 20% price limit, while overnight ETFs operate with a 5% band. These bands are applied on a base price derived from the ETF's net asset value (NAV) two trading days ago (T-2).

Under the revised framework, the base price for ETFs will be the previous day's closing market price, calculated as the volume-weighted average price (VWAP) during the last 30 minutes of trading. If no trades take place during that period, the last traded price will be used. If there are no trades on the previous trading day, the latest available closing NAV will serve as the base price.

Sebi said stock exchanges and mutual fund houses should jointly address operational challenges to enable the use of T-1 closing NAV as the base price from 1 April 2027.

The regulator has also replaced the fixed-band regime for most ETFs with a dynamic mechanism.

For equity and debt ETFs, excluding liquid and overnight ETFs, trading will initially be permitted within a 10% band on either side of the base price. If trades occur at or above 9.9% of the band limit, a 15-minute cooling-off period will be triggered. After the cooling-off period, the band can be expanded by 5% of the base price. The process can occur twice in one direction, allowing the effective band to widen to 20%.

Where the trigger occurs during the last 30 minutes of trading, the cooling-off period will be reduced to five minutes. The expanded band will apply across all stock exchanges and will widen only in the direction of the price movement.

Liquid ETFs and overnight ETFs will continue to operate under a fixed 5% price band.

Commodity ETFs backed by gold and silver will be subject to a separate framework. These products will start with a 6% price band, which can be widened in stages of 3% after a cooling-off period. The cooling-off period will be triggered when trades occur at or above 5.9% of the band limit.

Unlike equity and debt ETFs, there will be no cap on the number of times price bands for commodity ETFs can be expanded during a trading session. Stock exchanges will also be allowed to relax limits further in exceptional circumstances if international commodity prices move beyond the aggregate domestic price limit after Indian markets have closed.

To improve price discovery, Sebi has mandated a call auction mechanism in the pre-open session for gold and silver ETFs. The move has been introduced as the underlying commodities trade continuously across international markets, while ETF units trade only during domestic market hours.

The changes follow recommendations from a working group of stock exchanges, deliberations by Sebi’s Secondary Market Advisory Committee and feedback received through a public consultation process that started in February.

The new norms will come into effect from September 2026.

Apoorva is a Mumbai-based journalist at Mint who covers the Securities and Exchange Board of India (SEBI), tracking the pulse of India’s capital markets, regulatory developments and the people who operate within them. She holds a postgraduate diploma in business and financial journalism from the Asian College of Journalism, where she developed a strong foundation in markets, companies, and economic policy. She began her journalism journey with an internship at Bloomberg, where she worked across beats such as real estate, infrastructure, capital markets, and deals, which helped her understanding of business and finance.<br><br>She is guided by the belief that everything in this world can be explained in simple and fewer words, and that idea shapes how she approaches her writing. She aims to cut through complexity and present nuanced regulatory and financial developments in a way that is both accessible and meaningful to readers.<br><br>When she is not tracking market chatter, Apoorva can usually be found deep into a fiction novel or out on a long run. She is also a trained classical dancer in Bharatanatyam, Mohiniyattam, and Kathakali.