By Kavya Jindal, Third-year Student at NLUO, Cuttack
INTRODUCTION
Exchange Traded Funds (‘ETFs’) have a distinct place in the Indian capital markets. Despite being similar to mutual fund schemes, they can be bought and sold in the stock exchange market as regular stocks would. The value of the ETFs is based on the underlying asset, which could be equity index, debt instruments, or commodities. In light of the same, the Securities and Exchange Board of India (‘SEBI’), on 1 February 2026, released a consultation paper (‘the Paper’) putting forth major reforms to the mechanism that governs base price determination and price bands for ETFs.
These reforms are prompted by the structural inefficiencies and heightened volatility primarily in gold and silver market, which have been consistently witnessed over the past few months. SEBI’s proposals show an inclination towards a more dynamic regulatory system based on data. This blog discusses the structural changes recommended in the Paper and their impact on ETF markets. It further analyzes the extent to which these recommendations can solve the problem of volatility, price discovery in the market and strengthening market stability.
KEY STRUCTURAL CHANGES PROPOSED
Revision of base price determination
The price bands for ETFs, under the existing framework, are calculated using the Net Asset Value (‘NAV’) of T-2, which is two trading days prior. This model leads to an inherent lag and does not rightly capture latest market developments. Therefore, SEBI has proposed shifting to T-1 reference values for determination of the base price on the trading day.
Multiple alternatives have been outlined in the Paper for such determination. These include: firstly, usage of T-1 closing traded price of the ETF, calculated as the weighted average price of the last 30 minutes of trading; secondly, the T-1 closing NAV, where it is available in time; thirdly, the average indicative NAV (‘iNAV’) of the last 30 minutes on T-1; lastly, the latest available iNAV on T-1. All of these alternatives aim to balance timelines with reliability.
Rationalisation of price bands
The present regulatory framework prescribes a fixed price band of ±20% for most ETFs and ±5% for overnight ETFs. SEBI has now proposed to move away from this one-size-fits-all approach by introducing differential initial price bands based on volatility profile of different ETF categories.
For equity and debt ETFs, the Paper introduces an initial price band of ±10%. This will include the possibility of flexing upward to ±20% during the trading day. For commodity ETFs, specifically gold and silver ETFs, a narrower initial band of ±6% is proposed. This reflects their association with global markets for commodities as well as derivatives and the inclusion of price limit adjustments in stages. Also, given the very low volatility associated with overnight ETFs, they will still remain subject to the existing ±5% price band. The different approach seeks to ensure that the permitted intraday price fluctuation is closer to reality.
Introduction of a flexing mechanism
The proposal of a dynamic flexing system appears to be a very important one. Instead of having a rigid range throughout the day, the initial band of ±10% or ±6%, in the case of equity/debt and commodity ETFs, respectively, can be extended after its threshold has been breached. After that point, there would be a temporary suspension of transactions until stability has been restored in the market.
CRITICAL ANALYSIS AND IMPLICATIONS
Base price reform: addressing the 1-day lag
Under the existing system, ETF price bands are determined using the closing NAV from T-2 (two days earlier). This inherently creates a one-day informational lag. This approach most likely appears to stem from operational limitations and time needed to disclose NAVs. However, relying on an outdated reference point has created structural lags and thereby contributed to heavy instability and increased volatility in the market. Due to this, there are chances of distortion of price alignment between ETFs and their underlying assets.
This may even affect the efficiency of arbitrage and thus affect the process of price discovery. The whole idea of arbitrage lies in the trader’s ability to exploit small differences between the ETF and its underlying asset. Since the NAV is determined using outdated data that does not represent current market values, arbitrage becomes difficult and allows prices to remain at a difference for longer than expected.
In the case of commodity ETFs, this becomes extremely serious since there is always a disparity in global prices all the time depending on time zones. Before the Indian market responds, the reference NAV would have become out of date, hence contributing to increased volatility and mispricing. Dividends and bonuses from corporations may need a manual update to the NAV, which poses challenges and makes it prone to mistakes. In today’s electronic markets, there is a need for quick processing and adjustment of prices according to new information. It is important to note that through automation, information on NAV is automatically updated without any manual input whatsoever, which reduces chances of delay or inaccuracies.
The transition to T-1 reference values in terms of NAV can be extremely effective in ensuring a greater degree of informational symmetry. With regards to ETF pricing, the transition will provide a more accurate estimate of the intrinsic value of ETFs. This would ensure that there is a greater degree of alignment with reality and that there would be a lower level of volatility due to outdated information.
However, using iNAV also presents certain challenges. Being an indicative measure, it could sometimes present outlier estimates of prices. In order to address this, SEBI must consider this risk when implementing any change towards real-time data usage. In any case, the new reform would likely lead to a more aligned relationship between ETF prices and the underlying asset values.
Price band rationalisation: from static to dynamic controls
Most ETFs, up till now, operate under a uniform ±20% daily price band, irrespective of underlying volatility. The empirical data cited by SEBI reveals that over 90% of equity and debt ETFs fluctuated within 10% in a trading day. Commodity ETFs on the other hand, remained broadly within 9%. Thus, the 20% band seems too wide when compared to the actual trading behaviour. There are differences in volatility profiles across ETFS, which is the primary issue with uniformity as it disregards these differences. A static band of 20% fails to reflect both, the empirical evidence and market structure. This in a way allows excessive price fluctuations which are not connected to the underlying fundamentals.
Introduction of initial ±10% (equity/debt) and ±6% (commodity) bands will better align regulatory thresholds with empirical data. This adjustment holds the potential to curb excessive market speculation and strengthen investor confidence. Further, this could also support more orderly price discovery by limiting sharp intraday fluctuations.
However, cooling-off pauses may occur more frequently if the limits are reached often. This could affect market liquidity. Market participants must adapt to a system where volatility management is more nuanced and data driven, instead of uniformly permissive.
Controls the flexing mechanism: stability vs. trading friction
The flexing regime is an important innovation. Once the initial range of prices is attained, there will be a pause/cooling-off period of about 15 minutes. The range will expand in stages once the necessary thresholds have been achieved. The idea here is to differentiate between price discovery and possible manipulation. By linking any relaxation of limits to adequate market depth and participation, SEBI aims to introduce surveillance into the market structure itself.
The complexity involved in implementation cannot be ignored cannot be overlooked, regardless it being theoretically efficient and accurate. For controlling the thresholds of trading and making necessary adjustments, it is important to have proper technology. Frequent intraday pauses can lead to many problems for institutional traders and disrupt algorithms used in trading. Also, the activities of arbitrageurs, who help to keep the ETF price stable and in line with the price of underlying assets, may become limited during cooling-off periods. The activities of arbitrageurs include purchasing an under-valued asset and selling an over-valued one in order to correct the discrepancy between the ETF price and the price of underlying assets. However, due to restrictions imposed on trading, it becomes impossible for arbitrageurs to conduct their operations.
Therefore, the flexing mechanism if executed effectively, has the potential to enhance systemic resilience while preserving price discovery integrity. This indicates a regulatory shift towards dynamic circuit controls.
Commodity ETFs: global linkages and regulatory sensitivity
Gold and silver ETFs are uniquely sensitive to international price movements. Global commodity markets operate across time zones. Indian exchanges on the other hand, function within fixed trading hours. In January-February 2026, primarily, such heightened volatility brought out the incompetency of the T-2 based system and exposed its weakness.
To put forth an example, Gold ETFs plunged sharply by almost 7% in a single session and overall witnessed a drop of around 18% from their peak on 29 January, 2026. Likewise, Silver ETFs faced extreme volatility with many hitting almost the 20% lower circuit, even though their actual decline during the season was around 10-15%. These extreme disruptions were primarily triggered by sharp movements in global markets. On one day, international spot gold prices dropped by 10%, and silver prices crashed nearly 30% in a single day. Both of them indicative of one of the steepest and worst declines on record.
In light of the same, the proposal by the SEBI to introduce an initial ±6% band brings commodity ETFs in line with the overall daily price limits applicable to derivate contracts. Permitting the band to expand in increments of 3% posits sensitivity to movements in global prices, simultaneously, also maintaining an overall cap of 20%.
This approach promotes coherence and integrity across trading segments. However, if the band expands too frequently, there is also a possibility of enhanced intraday halts especially in volatile global scenarios. Therefore, the proposals if executed should be done with utmost precision, so that the intended motive can be achieved.
Broader market implications
The proposals also carry with them implications beyond technical rectifications. Narrowed initial bands at the initial stage along with cooling-off periods will most likely enhance protection for retail investors, against sudden volatile spikes, as has been aimed rightly. Further, for Asset Management Companies (‘AMCs’) improved alignment curtails reputational risk arising from price-NAV derivations. Exchanges benefit from more structured volatility management tools.
However, arbitrageurs and institutional traders must necessarily adjust to possible trading halts and conditional relaxation of the bands. Over time, if properly implemented, such regulatory changes will contribute to more disciplined behaviour and minimize the impact of speculation within the market. From a systemic perspective, the regulatory changes constitute an example of preventive regulation designed to rectify inherent inefficiencies that might otherwise lead to instability within the market system.
CONCLUSION AND WAY FORWARD
The paper can be seen as an illustration of a shift towards a recalibration of ETF markets. Of the possible choices of base price, it may be more sensible, commercially speaking, to use the closing price traded or closing NAV at T-1 than using the latest iNAV as it is vulnerable to outliers. Moreover, it would make sense to introduce the changes in phases, specifically when dealing with commodity ETFs. This would allow the market players to adjust to the new system without difficulty. To conclude, the shift from the strict 20% band to the more fluid and contingent system represents a major step forward in terms of regulation. The effectiveness of such a move would depend not only on its design but also on how well it is implemented and enforced.
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