Sebi’s new ETF rules apply today: What changes from September 7 and how they impact investors?

Investors in exchange-traded funds (ETFs) could see fewer instances of prices drifting significantly away from their underlying value, particularly during sharp market moves. New trading rules that came into effect on September 7 change how ETF price bands are set and bring reference prices closer to actual market levels, with limits tailored to different asset classes.

The changes are particularly significant for gold and silver ETFs, which now have a pre-open auction and greater flexibility for price bands to expand when global bullion prices move sharply overnight.

One key change is how exchanges determine the base price for applying price bands. Under the existing framework, exchanges use the ETF’s Net Asset Value (NAV) from two trading days earlier, or T-2, for this purpose.


Sebi has now 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. The change removes the one-day lag that can cause ETF prices and the value of their underlying assets to move out of sync.

The market regulator has also moved away from the earlier system of fixed price bands. Until now, most ETFs were subject to a price band of up to 20%, irrespective of the volatility of the underlying asset. Under the revised framework, price bands will be dynamic and will vary depending on the type of asset tracked by the ETF. This is expected to allow ETF prices to respond more efficiently to market movements while avoiding unnecessary trading restrictions.

What changes from today?

1.) The first change is to the base price used to determine the day’s trading range. Instead of relying on an older valuation, the base price will now be the previous day’s closing price, calculated as the volume-weighted average price (VWAP) of the ETF’s trades during the last 30 minutes of the previous session. In effect, the day’s trading range will begin from where the ETF actually traded towards the close of the previous session, rather than from a two-day-old valuation.

2.) The second change is to price bands, which will now vary according to the underlying asset. Equity and debt ETFs will begin the day with a 10% price band, which can widen in steps up to 20%.

A 15-minute cooling-off period will apply each time the limit is tested. Gold and silver ETFs, meanwhile, will start with a tighter 6% band. However, given that global bullion prices move around the clock, their bands can expand in 3% steps with no upper cap. This allows the ETF price to adjust towards its fair value even after a large overnight move in global markets. Overnight and liquid ETFs, whose values barely move, will continue to have a fixed 5% band.

3.) The third change applies specifically to gold and silver ETFs, which will now begin each trading day with a pre-open call auction, the same mechanism used for stocks. During this process, buy and sell orders are collected before the market opens and matched at a single equilibrium price. This means the opening price is determined by the balance of demand and supply rather than by the first stray order of the day.

The revised framework is aimed at making ETF price discovery more responsive to the underlying assets, particularly when there are significant overnight moves in global markets.

What does it mean for investors?

For ETF investors, the changes are expected to bring ETF prices closer to the value of their underlying assets, reducing instances of large premiums or discounts to NAV.

They could also improve liquidity and price discovery, especially during volatile market conditions, while making trading in commodity ETFs more efficient.

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