SEBI Overhauls ETF Trading Norms: New Base Price, Dynamic Price Bands and Pre-Open Call Auction

[SEBI Circular No. HO/47/11/11(1)2026-MRD-POD3/I/13804/2026 dated 15 June 2026, effective from 7 September 2026]

Introduction

Exchange Traded Funds (“ETFs”) have moved from a niche product to a core part of Indian portfolios, with investors using them to buy gold, silver, debt and market indices on the stock exchange. Unlike a mutual fund unit bought at the day’s Net Asset Value (“NAV”), an ETF unit trades through the day at a price set by buyers and sellers, and that price is meant to stay close to the value of the underlying assets. Trading rules therefore matter greatly for ETFs, because a badly designed price band can either choke legitimate trades or let the market price drift from the underlying value.

Previously, equity and debt ETFs (other than overnight and liquid ETFs) and commodity ETFs were subject to a fixed price band of 20% on either side of the base price, while overnight and liquid ETFs were subject to a 5% band. The base price was linked to the ETF’s NAV from two trading days earlier. SEBI’s review identified the need for a base price that better reflects recent trading and for price bands that respond to movements in the underlying asset. Following consideration by its Secondary Market Advisory Committee and a public consultation, SEBI issued a circular on June 15, 2026. The implementation date was subsequently extended from September 1 to September 7, 2026.

Explanation: Link to the Circular

The circular is addressed to recognised stock exchanges, clearing corporations, asset management companies of mutual funds and the Association of Mutual Funds in India. It is issued under Section 11(1) of the Securities and Exchange Board of India Act, 1992 read with Regulation 51 of the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018, and builds on the price band and close-out provisions of SEBI’s Master Circular for Stock Exchanges and Clearing Corporations dated 30 December 2024. Market infrastructure institutions must put in place the necessary systems, amend their bye-laws and rules where required, and inform investors. The circular was to apply from 1 September 2026, but a circular dated 28 August 2026 moved the date to 7 September 2026 and left every other provision unchanged.

Explanation

The first change concerns the base price. Under the revised framework, the base price is the ETF’s closing price on the previous trading day, calculated using the Volume-Weighted Average Price (“VWAP”) of trades executed during the last 30 minutes of that day. If the ETF does not trade during that period, its last traded price for the day is used; if it does not trade at all on the previous trading day, the latest available closing NAV applies. The base price is also adjusted for corporate actions. Separately, SEBI has directed stock exchanges and asset management companies to address operational issues so that the previous day’s closing NAV can be used as the base price from April 1, 2027.

For equity ETFs and debt ETFs, other than overnight and liquid ETFs, the fixed 20% band gives way to a dynamic band. The initial band is 10% on either side of the base price. Once trades are executed at or above 9.90% of the base price, a cooling off period of 15 minutes begins, during which trading continues within the prevailing band. If this level is reached in the last 30 minutes of the session, the cooling off period is only five minutes. After the cooling off period, the band is flexed by 5% of the base price, a maximum of two times in one direction, so that it can widen to 20% in total. The band moves only in the direction of the price movement, without any corresponding adjustment on the opposite side, and a flex at one exchange applies at the other exchanges. Overnight ETFs and liquid ETFs keep a fixed band of 5%.

Gold and silver ETFs receive a tailored version. The initial band is 6% on either side, and it is flexed by 3% of the base price after a cooling off period, which is 15 minutes, or five minutes in the last 30 minutes of trading, once trades occur at or above 5.90%. Where international prices move by more than the aggregate daily price limit of 9%, the stock exchange may relax the band further in steps of 3%, after giving the market notice with details and justification. If extreme movement in the underlying commodity occurs abroad after domestic trading closes, exchanges may also relax the initial band, again with notice. For commodity ETFs there is no upper or lower cap on the band and no limit on the number of times it can be flexed within a session.

Gold and silver ETFs will also have a call auction in the pre-open session. SEBI’s reasoning is that the underlying commodities trade almost continuously across the world, while the ETF trades only during domestic hours, so an opening auction helps the market find an equilibrium price. The mechanism will be the same as the one already prescribed for equity scrips in the Master Circular.

Finally, the circular changes the close-out procedure for overnight and liquid ETFs. For these two categories, the close-out price will be the higher of two figures: the highest price recorded in the ETF in the settlement in which the contract was entered into, up to the date of auction or close-out, and a price 5% above the latest closing price on the day on which auction offers are called. For all other ETFs, the existing close-out provisions of the Master Circular continue, as do the existing provisions on auction and proceeds from auction or close-out.

Conclusion

The circular replaces a fixed price-band approach with a framework that responds to the type of ETF and the extent of price movement. For equity and debt ETFs, the initial 10% band may widen in stages up to an aggregate 20%; for gold and silver ETFs, the initial 6% band may be flexed in 3% steps, subject to the specific conditions in the circular. The revised base-price methodology is intended to better reflect recent trading, while the pre-open call auction for gold and silver ETFs is intended to support price discovery where international commodity prices may have moved while domestic markets were closed. These mechanisms may help address pricing mismatches, but their effectiveness will depend on market conditions and implementation.

For market participants, implementation is the immediate priority. Stock exchanges and clearing corporations must make the necessary system changes and amend their bye-laws or rules where required; asset management companies should ensure their processes align with the revised base-price and price-band framework. Brokers should explain the pre-open call auction to clients trading gold and silver ETFs, particularly those placing orders near market opening. Participants should also prepare for the further change scheduled for April 1, 2027, when the previous day’s closing NAV is intended to become the base price, subject to the operational arrangements directed by SEBI.

Last Updated on 30 October, 2026