Sebi changes ETF trading rules from today: What investors need to know

Sebi changes ETF trading rules from September 7 with new price bands, base price rules and pre-open auctions for gold and silver ETFs.

New trading rules for exchange-traded funds (ETFs) announced by Sebi come into effect from September 7, changing how ETF prices, trading limits and opening prices are determined.

The Securities and Exchange Board of India (Sebi) has introduced a revised framework for ETF trading from September 7, bringing changes to base prices, price bands, pre-open trading and the close-out process.

For investors, Sebi’s new ETF rules are largely a positive change because they are designed to make ETF prices adjust more closely to the value of the underlying assets, especially when markets are volatile. Gold and silver ETFs will have greater flexibility to respond to overnight global price movements, while the new pre-open auction should help establish a more realistic opening price. However, investors should remember that ETFs can still trade above or below their NAV, and the new rules do not guarantee higher returns. Checking the iNAV and using limit orders remains important, particularly for less-liquid ETFs.

The changes were originally scheduled to take effect from September 1 but were postponed to give stock exchanges and market participants additional time to prepare. The regulator’s objective is to make ETF prices respond more closely to the value of their underlying assets, particularly during periods of sharp market volatility.

What is changing in ETF trading?

An ETF has two important values: its net asset value (NAV), which represents the per-unit value of the securities held by the fund, and its market price, which is determined by buying and selling on the exchange.

These values can move apart, particularly when an ETF has low trading volumes or markets are experiencing sharp movements.

Under the previous system, an ETF’s base price was generally linked to its NAV from two trading days earlier, known as the T-2 NAV.

From September 7, the base price will instead be linked to the ETF’s previous trading-day closing price. This will be calculated using the volume-weighted average price (VWAP) of trades during the final 30 minutes of the previous session.

New price bands for different ETFs

Sebi has introduced different initial price bands depending on the type of ETF.

Equity and debt ETFs will have an initial 10% price band, which can be widened in stages up to 20%. Whenever the existing limit is reached, a 15-minute cooling-off period will apply before the band can be expanded further.

Gold and silver ETFs will have an initial 6% band. Their price bands can subsequently be widened in 3% increments without a specified upper limit.

This is particularly relevant for precious metal ETFs because international gold and silver prices can change significantly while Indian markets are closed.

Overnight and liquid ETFs, where the underlying value is relatively stable, will continue to have a fixed 5% price band.

Gold and silver ETFs get pre-open auction

Gold and silver ETFs will also have a pre-open call auction from September 7.

During this process, buy and sell orders are collected before trading begins and matched at an equilibrium price. The system is intended to make the opening price more representative of overall demand and supply.

This could be particularly important for gold and silver ETFs because their underlying global prices can move substantially between the close of one Indian trading session and the opening of the next.

What does this mean for investors?

The revised rules are aimed at improving price discovery and helping ETF prices adjust more efficiently to movements in their underlying assets.

However, the changes do not mean an ETF will always trade exactly at its NAV. Market demand, supply and liquidity can still cause an ETF to trade at either a premium or a discount to its NAV.

The new framework also does not change ETF returns, costs or taxation.

Investors should therefore continue to check the indicative NAV, or iNAV, before placing trades. Limit orders can also be useful, particularly when trading ETFs with relatively low liquidity.

Sebi also eases FPI disclosure requirements

In a separate decision, Sebi has removed the requirement for foreign portfolio investors (FPIs) investing exclusively in Indian government securities to provide investor group details.

The move is intended to reduce regulatory compliance requirements for foreign investors focused only on government securities.

The decision follows the Reserve Bank of India’s June 5 move to withdraw the concentration limit requirement for FPIs investing in government securities through the general route.

Sebi said that, as a result, identifying an investor group for an FPI investing only in government securities was no longer relevant.

The exemption takes effect immediately.

The ETF changes are mainly focused on improving price discovery and allowing market prices to adjust more effectively during periods of volatility.

For investors, the key takeaway is that trading limits and opening mechanisms will now vary depending on the ETF category. Gold and silver ETFs, in particular, will have greater flexibility to respond to movements in international bullion prices.

The separate FPI measure is aimed at simplifying compliance for foreign investors whose investments are restricted to Indian government securities.