India’s market regulator has moved to reshape how exchange-traded funds are priced for trading, proposing a framework intended to narrow the gap between ETF market prices and the value of the assets they track. The Securities and Exchange Board of India set out the changes in a June 15 circular covering base prices, price bands, pre-open call auctions and close-out procedures for ETFs, with the new provisions scheduled to come into effect on September 1, 2026.

The proposal is directly aimed at a structural issue in ETF trading. ETFs are listed instruments that trade on exchanges throughout the day, but their fair value depends on the net asset value of underlying securities, debt instruments or commodities. When the reference price used for price bands is stale, or when fixed trading bands fail to reflect moves in the underlying market, an ETF can trade at a wider premium or discount to NAV than investors expect from a passive product.

Reuters reported on June 15 that SEBI’s proposed changes seek to narrow the gap between an ETF’s base price and the value of its underlying assets. The regulator’s circular shows that the current framework applies a fixed price band of 20% to equity, debt and commodity ETFs, except for overnight ETFs, where the band is 5%. That band has been applied on a base price linked to the T-2 day net asset value of the ETF, creating a lag that can matter in volatile markets.

Under the revised approach, SEBI said that, to start with, the base price used to determine ETF price bands will be the T-1 day closing price, defined as the last 30 minutes’ volume-weighted average price of the ETF. If an ETF does not trade in that final 30-minute window, the base price will be the last traded price from the previous session. If there was no trade during the previous session, the base price will be based on the latest available closing NAV of the ETF.

The practical effect is to move the trading reference closer to the most recent exchange-traded value, while preserving a NAV-based fallback for thinly traded products. SEBI also said the base price must be adjusted for corporate actions, if any. The circular indicates that exchanges and asset management companies are expected to work together to address operational challenges and implement the use of T-1 day closing NAV as the base price from April 1, 2027.

For equity and debt ETFs, other than overnight and liquid ETFs, SEBI’s proposed band structure would replace the broad fixed framework with dynamic price bands. The initial band will be 10% on either side of the base price and can be flexed up to 20% after a cooling-off period. The regulator specified that the price band would be flexed by 5% of the base price after the cooling-off period, for a maximum of two instances in one direction.

The cooling-off design is intended to allow price discovery without immediately permitting large moves through the full available range. SEBI said the cooling-off period will be 15 minutes after trades are executed at or above 9.90% and comparable thresholds, during which trading will continue within the prevailing band. If those trades take place during the last 30 minutes of the session, the cooling-off period will be reduced to five minutes.

The framework also addresses cross-exchange consistency. SEBI said flexing of the price band for an ETF at one exchange will be applicable for other exchanges. That provision matters in a market where an ETF may be listed across venues and where fragmented reference prices can create confusion for brokers, arbitrageurs and investors. Applying band flexing across exchanges should reduce the risk that the same ETF is constrained differently on different platforms during fast markets.

Overnight ETFs and liquid ETFs will be treated separately. SEBI’s circular keeps a fixed 5% price band for those categories, reflecting their lower volatility profile and the short-duration nature of the underlying exposure. For investors using these instruments as cash-management or treasury-allocation tools, the retention of a narrower fixed band suggests the regulator is distinguishing between ETFs that track more volatile assets and those designed around relatively stable short-term instruments.

The most distinctive provisions apply to commodity ETFs, specifically gold and silver products. These funds track commodities that trade continuously across international markets, while Indian-listed ETF units trade only during domestic exchange hours. That mismatch can produce opening-price gaps after overnight moves in global bullion markets. SEBI’s circular states that commodity ETFs will have dynamic price bands with an initial 6% band, which can be flexed by 3% of the base price after a cooling-off period.

The commodity ETF rules include further flexibility for large global moves. If international market price movement exceeds the aggregate daily price limit of 9%, the band may be further relaxed in stages of 3% by the stock exchange after a cooling-off period. SEBI said exchanges must give appropriate notice to the market, including relevant details and justification, in such cases. The circular also allows exchanges to relax initial price bands when exceptional commodity-price movement occurs after domestic ETF trading has closed.

For gold and silver ETFs, SEBI also decided that a call auction will be conducted in the pre-open session to help discover an equilibrium price before trading begins. The mechanism is designed to address the fact that the underlying commodity may have moved materially in global markets before Indian ETF trading opens. A pre-open auction can concentrate orders at the start of the session and establish a cleaner opening reference than a fragmented set of early trades.

The commodity ETF framework is more open-ended than the framework for equity and debt ETFs. SEBI said there will be no upper or lower cap on the price bands for commodity ETFs and no restriction on the number of times the bands can be flexed during the trading session. That approach gives exchanges discretion to accommodate outsized moves in gold and silver prices, while still requiring staged adjustments, cooling-off periods and market notices.

From a fund-strategy perspective, the proposed rules are relevant to ETF sponsors because secondary-market execution quality is central to investor confidence in passive products. Asset managers can design index-tracking portfolios, but investors experience those funds through traded prices, bid-ask spreads and the ability to transact near fair value. When listed ETF prices are constrained by outdated reference prices, authorized participants and market makers may face less efficient arbitrage conditions, increasing the chance of visible premiums or discounts.

The framework also matters for retail investors, who often use ETFs as low-cost building blocks for market exposure but may not monitor intraday NAV estimates, implied fair values or liquidity depth. A tighter and more adaptive base-price framework does not eliminate tracking error or market-price deviation, but it can reduce one source of mechanical distortion. By making bands more responsive to recent trading and underlying-market moves, SEBI is seeking to align the exchange-traded experience more closely with the economic exposure investors intended to buy.

For exchanges and clearing corporations, the circular creates implementation work. SEBI directed market infrastructure institutions to take necessary steps and put systems in place for the framework, amend relevant bye-laws, rules and regulations where required, and communicate the provisions to market participants and investors. The September 1 effective date gives exchanges, clearing corporations, asset managers and industry bodies a defined runway to update trading systems and operational procedures.

The move also sits within a broader regulatory effort to refine India’s secondary-market structure as participation in mutual funds and passive products grows. The ETF market depends on both primary-market creation-redemption activity and secondary-market liquidity. Price-band rules are part of the secondary-market architecture: they are designed to contain disorderly moves, but if they rely on stale inputs, they can also prevent prices from adjusting efficiently to genuine changes in underlying value.

The rule change is not a guarantee that ETF discounts and premiums will disappear. ETF market prices can still diverge from NAV because of bid-ask spreads, uneven market-maker participation, low trading volumes, cash components, securities-lending conditions, overseas-market holidays or sharp moves in less liquid underlying assets. However, using a more current reference point and allowing staged band flexing should reduce avoidable distortions created by the trading framework itself.

The distinction between ETF categories is especially important. Equity and debt ETFs will receive a dynamic but capped framework, overnight and liquid ETFs will keep narrower fixed bands, and gold and silver ETFs will receive more flexible treatment because their underlying commodities trade globally outside Indian market hours. That category-specific approach suggests SEBI is trying to balance investor protection with market efficiency rather than applying one uniform price-control rule across products with different risk profiles.

For global passive-investing observers, India’s ETF pricing reform highlights a common issue in fast-growing markets: product innovation can outpace trading infrastructure unless rules adapt to liquidity and asset-class behavior. ETFs are designed to be transparent and tradable, but their efficiency depends on accurate reference prices, arbitrage channels, market-maker incentives and exchange rules that permit fair-value discovery. SEBI’s changes focus on the reference-price and band components of that ecosystem.

The next phase will be implementation. Market participants will watch whether the new base-price hierarchy, dynamic band flexing and commodity ETF pre-open auctions reduce visible price dislocations after the rules take effect. They will also track the planned April 2027 shift toward T-1 closing NAV as the base-price reference, which could further align the rulebook with the fund-level valuation process once operational challenges are resolved.

For ETF investors, the immediate takeaway is that India’s regulator is moving from a relatively static price-band regime toward a more responsive framework. The proposed structure should give exchanges more flexibility during genuine market moves while preserving cooling-off periods and category-specific safeguards. In a market where passive investing is becoming more prominent, that combination could become an important part of making ETF execution more predictable, transparent and aligned with NAV.