The Indian capital market is undergoing continuous reforms to strengthen investor protection and improve market efficiency. As part of these efforts, the Securities and Exchange Board of India (SEBI) has introduced significant changes to the trading rules governing Exchange Traded Funds (ETFs). These changes aim to better align ETF prices with the prices of their underlying assets, thereby improving price discovery and making trading more efficient.
Let us understand SEBI’s new rules in detail and see how these changes are creating new opportunities and shaping the future of the ETF market for companies and investors.
What’s Happening?
Currently, a fixed price limit of 20% applies to equity, debt, and commodity ETFs, while overnight ETFs have a 5% price band. These bands are based on the ETF’s Net Asset Value (NAV) from two trading days earlier (T-2). SEBI believes that the delay and the use of fixed bands do not accurately reflect movements in the underlying assets.
Under the new framework, the base price of an ETF will be the previous trading day’s closing market price, calculated using the Volume Weighted Average Price (VWAP) of the last 30 minutes of trading. If no trades occur during that period, the last traded price will be used. If no trades take place throughout the day, the latest available closing NAV will become the base price.
Stock exchanges and mutual fund houses have also been asked to address operational challenges to enable the use of T-1 closing NAV as the base price from April 1, 2027.
Dynamic Price Bands and Category-wise Changes
SEBI has introduced a dynamic price limit mechanism in place of fixed bands for most ETFs.
For equity and debt ETFs (excluding liquid and overnight ETFs), trading will initially take place within a 10% price band. If the price reaches 9.9% or above the band limit, a 15-minute cooling-off period will be triggered. After this, the price band can be expanded by an additional 5% from the base price. This process can occur twice in one direction, allowing the effective price band to reach up to 20%.
If the trigger occurs during the last 30 minutes of trading, the cooling-off period will be reduced to 5 minutes. The expanded band will apply across all exchanges and only in the direction of the price movement.
Liquid and overnight ETFs will continue to have a fixed 5% price band. Gold and silver-backed commodity ETFs will have an initial 6% price band, which can be expanded in stages of 3%. For these ETFs, the cooling-off period will be triggered at 5.9%, and there will be no cap on the number of price band extensions. In exceptional circumstances, further relaxation based on international commodity prices may also be permitted.
New Steps to Improve Price Discovery
SEBI has also made the Call Auction mechanism mandatory during the pre-open session for Gold and Silver ETFs.
The primary reason for this change is that commodities such as gold and silver are traded almost throughout the day in global markets, whereas ETF units in India can only be bought and sold during domestic market hours. This can create a gap between international prices and domestic ETF prices.
The pre-open call auction system will help determine prices more accurately before the market opens and bring ETF prices closer to global market signals.
What Does This Mean for Investors?
These changes are aimed at making ETF trading more transparent and reliable for investors. Under the earlier framework, fixed price bands and the T-2 NAV delay sometimes caused ETF prices to deviate from their underlying assets.
The new dynamic system will allow prices to adjust more efficiently, improving liquidity and helping investors secure better entry and exit points. In particular, investors in gold and silver ETFs could benefit from a more accurate reflection of international price movements.
Overall, this framework is expected to improve market efficiency and strengthen the appeal of ETFs as an investment option.
What’s Next?
These new rules, which were developed after public consultations, recommendations from stock exchanges, and discussions within SEBI’s various committees, will be implemented from September 2026. The objective is to make ETF trading more closely aligned with actual market conditions.
In the coming years, these reforms are expected to improve transparency and efficiency in the ETF market. Following the proposed transition to T-1 NAV in 2027, ETF prices will be able to reflect their underlying assets more accurately.
This could increase the popularity of equity, debt, and commodity ETFs, while investors may benefit from better price discovery and reduced price deviations. Over the long term, these reforms could contribute to making the Indian capital market stronger and more mature.
Disclaimer: This article is for educational and informational purposes only and does not constitute investment advice or a recommendation to buy or sell any securities. The companies mentioned are cited as examples within the context of market developments. Investors are advised to conduct their own due diligence and consult their financial advisor before making any investment decisions.
Investments in the securities market are subject to market risks. Read all related documents carefully before investing.
