SEBI Revises ETF Trading Framework to Keep Prices Closer to Underlying Asset Values

The Securities and Exchange Board of India (SEBI) has introduced changes to the way Exchange Traded Funds (ETFs) are traded on stock exchanges. The new framework aims to ensure that ETF prices stay closer to the value of the assets they track, reducing price mismatches and improving market efficiency. The changes will come into effect from 1 September 2026.

What has changed?

Currently, stock exchanges use the ETF's Net Asset Value (NAV) from two trading days earlier (T-2) to determine the base price for applying price bands.

SEBI has replaced this with a more recent reference price, such as the previous day's closing NAV or other real-time valuation measures, depending on the ETF category. This removes the one-day lag that often causes ETF prices and their underlying asset values to become misaligned.

Until now, most ETFs were subject to a fixed price band of up to 20%, regardless of the underlying asset's volatility.

Under the revised framework, price bands will be dynamic and vary by the type of asset the ETF tracks. This is expected to allow ETF prices to adjust more efficiently to market movements while preventing unnecessary trading restrictions.

SEBI has also introduced a pre-open call auction mechanism for commodity ETFs.

The move is aimed at improving price discovery before regular trading begins, especially for ETFs linked to assets such as gold and silver, where global prices can change significantly overnight.

Why did SEBI make these changes?

According to SEBI, the existing framework created two key challenges:

• ETF price bands were based on outdated NAV data, resulting in a mismatch between ETF prices and the value of their underlying assets.
• Manual adjustments for corporate actions increased operational complexity and the risk of errors.

What does this mean for investors?

For ETF investors, the changes could lead to:

• Better alignment between ETF prices and underlying asset values.
• Reduced instances of ETFs trading at large premiums or discounts to their NAV.
• Improved liquidity and price discovery, particularly during volatile market conditions.
• More efficient trading in commodity ETFs.

While the changes are largely operational, they are expected to make ETF trading more transparent and efficient over time.

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