SEBI has overhauled the trading framework for Exchange Traded Funds (ETFs), replacing the decades-old fixed price band system with dynamic, asset-specific limits that better reflect the actual volatility of the underlying assets. The new rules, which take effect from September 1, 2026, replace the one-size-fits-all 20% price band with a tiered mechanism that starts tighter and expands only after a cooling-off period. For commodity ETFs tracking gold and silver, a separate framework with a narrower initial band and unlimited expansion capacity has been introduced alongside a pre-open auction mechanism for better price discovery.
What Is an Exchange Traded Fund?
An Exchange Traded Fund (ETF) is a passively managed investment fund that holds a basket of securities such as stocks, bonds, or commodities, and trades on a stock exchange just like an ordinary share. Unlike traditional mutual funds, which are priced once a day after market close based on their Net Asset Value (NAV), ETFs can be bought and sold throughout trading hours at market-determined prices.
The price of an ETF on the exchange is supposed to stay close to its Net Asset Value (NAV), which is the per-unit market value of all the underlying assets held by the fund. For instance, a Nifty 50 ETF holds shares of the 50 companies in the Nifty index, and its NAV moves in line with that index. Investors buy ETFs for their low expense ratios, tax efficiency, and the ability to gain diversified exposure to a market or sector with a single trade.
The Securities and Exchange Board of India (SEBI), established in 1988 and given statutory powers through the SEBI Act, 1992, is the regulatory body for India’s securities and commodity markets. Headquartered in Mumbai, SEBI operates under the Ministry of Finance and is responsible for protecting investor interests and regulating market intermediaries, including the trading frameworks for ETFs.
The Problem With the Old System
The old framework had two structural flaws. First, the base price used to set daily trading bands was pegged to an ETF’s NAV from two trading days earlier (T-2). This one-day lag meant that by the time markets opened, the reference price could be stale, especially on days when the underlying asset had moved sharply in global markets overnight.
Second, a flat 20% price band was applied uniformly across all ETF categories, regardless of how volatile the underlying asset actually was. A Gold ETF, a Liquid ETF, and an equity index fund were all treated identically, even though their price behaviour is fundamentally different. This mismatch allowed ETF market prices to drift meaningfully away from their fair value during active trading sessions, undermining the very purpose of an ETF, which is to track its underlying asset as closely as possible.
The new framework, finalised after recommendations from SEBI’s Secondary Market Advisory Committee and multiple rounds of public consultation, addresses both problems directly.
New Base Price Methodology
From September 1, 2026, the base price for an ETF will no longer rely on the T-2 NAV. Instead, it will follow a clear three-tier priority order:
The primary reference will be the previous trading day’s closing price, calculated as the Volume Weighted Average Price (VWAP) of trades executed during the final 30 minutes of the trading session. If no trades occur in that window, the Last Traded Price (LTP) for the day will be used. If the ETF recorded no trading activity at all on the previous day, the most recent available closing NAV will serve as the fallback reference.
This single change eliminates the old one-day lag, bringing the reference price a full trading day closer to current market reality. SEBI has also directed stock exchanges and Asset Management Companies (AMCs) to work towards adopting the T-1 closing NAV as the standard base price from April 1, 2027, subject to resolving certain operational challenges.
Dynamic Price Bands for Equity and Debt ETFs
Instead of the blanket 20% band applied uniformly across every category, equity and debt ETFs (excluding overnight and liquid ETFs) will now trade under a dynamic price band system.
| Parameter | Old System | New System |
|---|---|---|
| Initial price band | Fixed 20% for all | 10% (dynamic) |
| Maximum expansion | Not applicable | Up to 20% |
| Expansion increments | Not applicable | 5% steps |
| Cooling-off period trigger | None | Price move of 9.90% or more |
| Cooling-off duration | None | 15 minutes (5 minutes if in last 30 min of trading) |
Trading begins with a tighter 10% band above or below the base price. If the market price reaches or exceeds 9.90% of the base price, a cooling-off period is triggered. Trading continues within the existing band during this pause, it does not halt. After the cooling-off period ends, the exchange can widen the band by an additional 5% increment in the direction of the price movement. This process can be repeated up to twice in the same direction, effectively allowing the band to expand to 20% during a single session.
If the trigger occurs during the final 30 minutes of trading, the cooling-off period is shortened to five minutes to account for the limited time remaining.
Overnight and liquid ETFs, which hold extremely low-volatility assets, will continue to operate under the existing fixed 5% price band.
Special Framework for Gold and Silver ETFs
Commodity ETFs that track gold and silver present a unique challenge. Unlike equities, these metals trade continuously in global markets even after Indian exchanges close for the day. When domestic markets reopen the next morning, the international price of gold or silver may have moved significantly, creating a gap between the ETF’s closing price and the actual value of the underlying metal.
To address this, SEBI has prescribed a separate set of rules for gold and silver ETFs.
| Parameter | Old System | New System |
|---|---|---|
| Initial price band | Fixed 20% | 6% (dynamic) |
| Expansion stages | Not applicable | 3% increments |
| Cap on total expansion | Not applicable | No upper cap |
| Number of expansions per session | Not applicable | Unlimited |
| Pre-open auction | Not available | Introduced |
Trading will begin with an initial band of 6% above or below the base price. If the market price approaches this threshold, the band can be expanded in stages of 3% after a cooling-off period. Unlike equity and debt ETFs, there is no upper cap on the total price band expansion and no limit on the number of times the band can be widened during a trading session. This flexible structure acknowledges that international precious metal prices can move substantially while Indian markets are closed.
SEBI has also introduced a pre-open call auction mechanism for commodity ETFs. This is the same price-discovery tool already used for regular equities at market open. It allows buyers and sellers to submit orders before the market opens and arrive at a fair opening price based on cumulative demand and supply, rather than starting the day with a potentially mispriced reference point.
What the Changes Mean for Investors
The revised framework represents the most significant update to ETF trading norms in over a decade. For retail and institutional investors alike, the practical impact comes down to one thing: tighter alignment between the price at which an ETF trades on the exchange and its fair value.
Under the old system, an investor could buy a Gold ETF at a price meaningfully above its NAV, or sell an equity ETF at a discount to its true value, simply because the fixed 20% band was too wide and the T-2 NAV base price was stale. The new dynamic bands and updated base price methodology reduce this tracking error, particularly during volatile trading sessions when mispricing has historically been most visible.
The pre-open auction for commodity ETFs is especially valuable for investors holding gold or silver ETFs. It ensures that when Indian markets open, the ETF price reflects what happened in international bullion markets overnight, rather than forcing a sudden and disruptive price jump within the first few minutes of trading.
SEBI has also revised the close-out norms for overnight and liquid ETFs. Under the new rules, the close-out price will be the higher of the peak price recorded in the ETF up to the auction or close-out date, or a level 5% above the most recent available closing price on the day auction offers are invited. This provides a fairer settlement reference for these cash-management-oriented categories.
These changes do not alter the underlying portfolio or investment strategy of any ETF. They are purely operational and regulatory in nature, governing how ETF prices are bounded and discovered during exchange trading.
Key Takeaways
- SEBI replaced the fixed 20% price band for equity and debt ETFs with a dynamic band starting at 10%, expandable up to 20% after a cooling-off period.
- The base price for ETFs will now be calculated using the VWAP of the last 30 minutes of trading on the previous day (T-1), replacing the old T-2 NAV system.
- For gold and silver ETFs, the dynamic band starts at 6% and can be expanded in 3% increments with no upper cap on total expansion.
- The new framework includes a pre-open call auction mechanism for commodity ETFs to align opening prices with international bullion market movements.
- The cooling-off period is 15 minutes during regular hours and 5 minutes if triggered in the last 30 minutes of trading.
- Overnight and liquid ETFs continue to operate under a fixed 5% price band.
- The revised framework takes effect from September 1, 2026, with a further shift to T-1 closing NAV base price targeted for April 1, 2027.
