Market regulator Sebi floats proposal to revamp ETF price band framework

Regulator suggests linking ETF base price to T-1 data and introducing dynamic bands to better align trading ranges with underlying asset volatility

The Securities and Exchange Board of India on Friday floated a consultation paper proposing a comprehensive review of base price determination and price band norms for exchange-traded funds (ETFs), citing concerns over misalignment with underlying assets and operational risks under the existing framework.

 

At present, stock exchanges apply a uniform price band of 20 per cent on most ETFs — 5 per cent for overnight ETFs — using the T-2 day closing net asset value (NAV) as the base price. Sebi said this practice creates an inherent one-day lag, increases the risk of manual errors in adjusting for corporate actions, and may result in excessively wide trading ranges that do not reflect the volatility of the underlying securities. 

Earlier this month, the T-2-based price bands had led to issues in gold and silver ETFs. Amid heightened volatility in the prices of the precious metals, the BSE on February 1 announced it would use T-1 NAV for gold and silver ETF price band calculations. 

To address this, the regulator has proposed shifting to a system linked to T-1 day data. The base price on the trading day could be derived from either the ETF’s closing price on T-1 day, the average indicative NAV (iNAV) of the last 30 minutes, or the closing NAV of T-1 day, where available.

 

Using T-2 NAV, Sebi said, often leads to price bands that are out of sync with actual market conditions.

 

In the consultation paper, Sebi has proposed differentiated and dynamic price bands for ETFs based on their underlying assets. For equity and debt index ETFs, an initial price band of 10 per cent is proposed, which can be flexed up to 20 per cent during the trading session subject to cooling-off periods and liquidity conditions. Commodity ETFs linked to gold and silver would have a tighter initial band of 6 per cent, expandable in stages depending on price movements in international markets, while retaining an overall daily cap of 20 per cent. Overnight ETFs would continue to have a fixed band of 5 per cent.