In a consultation paper that’s open for comments until 6 March, the regulator suggested shifting the base price calculation for ETFs from a two-day-old value to the previous day’s data.

Mint explains the proposed changes and what they mean for investors.

What are the proposed changes?

Sebi suggested that instead of using the net asset value (NAV) from two days earlier (T-2) to set price bands for ETFs, exchanges should use data from the previous trading day (T-1). To decide the base price for the next trading day, it has proposed three options—the ETF’s closing market price on T-1 (based on the average traded price in the last 30 minutes), the average indicative NAV (iNAV) during the last 30 minutes of T-1, or the closing NAV of T-1, if available.

NAV is the per-unit value of a mutual fund or ETF, calculated by dividing the total value of its underlying assets, after expenses, by the number of units outstanding. For stocks, the base price for applying price bands is generally the T-1 close.

Sebi also suggested reviewing the current price bands for ETFs. At present, most ETFs are allowed to rise or fall by up to 20% in a day, while overnight ETFs have a tighter limit of 5%. These price bands restrict how much a security’s price can move in a single trading session and are meant to prevent extreme volatility.

Why has Sebi proposed these changes?

The NAV change is necessary because the current practice of using T-2 closing NAV for ETFs creates a one-day lag in the base or reference value used for applying price bands. The closing NAV of ETFs typically differs between T-1 and T-2, which may affect alignment with prevailing prices. Corporate actions effective on T-1 are also adjusted manually in the T-2 NAV for determining the base price, increasing the risk of errors or omissions.

Sebi also believes the current uniform price band for ETFs may also be too wide, considering typical market movements in the segment. The regulator’s analysis of data from 1 April 2025 to 31 December 2025 showed that in more than 99.8% of equity and debt ETFs, the maximum daily movement was within 10%, and in more than 98% of commodity (gold and silver) ETFs, within 9%, while overnight ETFs varied between -5% and +5%. It also noted that during January, high volatility in gold and silver prices made existing price bands based on T-2 NAV inadequate to ensure alignment with the underlying assets.

Sebi has asked whether the current price band 20% for gold and silver ETFs should be removed so that it matches the daily price limits (DPL) that apply to gold and silver derivative contracts.

The markets regulator has also recommended a separate pre-open session for gold and silver ETFs before regular trading begins. Gold and silver prices move throughout the day in international markets, but these ETFs trade only during Indian market hours—9.15 am to 3.30 pm. A pre-open session could help discover a fair or equilibrium price before normal trading starts, especially if global prices have moved sharply overnight.

What do mutual funds think about the proposals?

Fund houses see the proposals as practical and workable. Mutual fund executives said the best way to calculate the base price is through a ‘waterfall’ approach, which involves first using the T-1 closing NAV as it reflects the market most accurately, and if that is unavailable, using the T-1 closing price. They also caution that iNAV is only indicative and may not always be completely accurate.

“The methodology for computing such NAVs (for commodity ETFs) or iNAVs should be clearly prescribed and standardized,” Siddharth Srivastava, head of ETF products & fund manager at Mirae Asset Investment Managers (India). “This is important because different asset management companies may adopt varying calculation methodologies for commodity ETFs.”

He added, “Stock exchanges will also need to evaluate and confirm whether the process can be modified to adopt T-1 NAV for determining base prices, given that NAV is typically declared late at night.”

Mutual funds are not expected to need major changes to their systems to implement the proposed changes. “Until now, such a requirement never came. Now that it has, the industry will make its process faster. There are no substantial changes needed for mutual funds, but they will have to strengthen their back end to provide the NAV faster,” said Anil Ghelani, head of passive investments and products at DSP Mutual Fund.

Ghelani added that aligning gold and silver ETF price bands with derivatives is logical, given their direct link to underlying commodities and because a pre-open session could help with price discovery, as international markets continue to move before the Indian markets open.

How will the proposed changes affect investors?

For retail investors, the changes are expected to make ETF pricing more accurate and aligned with actual market conditions. Using more recent data to set the base price should reduce the mismatch between ETF prices and their underlying assets. Revising price bands, particularly for commodity ETFs, can also ensure that trading limits better reflect real volatility. The proposals could create a protective buffer against sharp and sensitive price swings, helping investors trade at prices that are fairer and more transparent.

“On normal trading days, the proposed framework is unlikely to materially impact investors. However, during periods of significant price volatility, the revised mechanism will ensure that the applicable trading price band remains more current and reflective of prevailing market conditions,” said Srivastava.