The Securities and Exchange Board of India (Sebi) has proposed a revamp of the pricing framework for exchange-traded funds (ETFs) to narrow gaps between their prices and the value of their underlying securities.
In a consultation paper issued on February 13, 2026, Sebi suggested replacing the current T-2–based pricing framework with a more contemporaneous benchmark to remove the two-day lag and make price bands more responsive to market movements. Sebi has sought public comments on the proposals until March 6, 2026.
Why Sebi Proposed the Changes
Sebi said the review was needed to address gaps in the current ETF pricing framework that can lead to misalignment with the underlying assets and operational risks.
At present, ETF price bands are calculated using the closing net asset value (NAV) of T-2, unlike stocks and indices that rely on the previous day’s price. Sebi noted that this approach creates a misalignment between ETF trading prices and the value of their underlying securities.
It said “the existing practice of using the T-2 Day closing NAV for determining the base price for ETFs, results in an inherent lag of one trading day in the base/reference value used for applying price bands.”
In market terminology, T refers to the trade day, while T-1 denotes the previous trading session and T-2 refers to two trading days prior. Using a T-2 reference, therefore, means ETF pricing is based on valuations that are already two days old.
Sebi’s proposal comes at a time when ETFs in India, particularly gold and silver ETFs, have seen strong growth over the past few years. However, the pricing framework governing these ETFs has largely remained unchanged. Since ETFs trade like stocks on exchanges, any mismatch between their valuation and the movement of the underlying assets can widen pricing differentials and potentially dent investor confidence.
Sebi said its objective is to create a framework that better reflects real-time market dynamics.
How Sebi Proposes To End T+2 Pricing Lag
To address this issue, Sebi has proposed shifting to more contemporaneous reference points. The base price on T Day may be derived from one of the following:
“Closing price of ETFs on T-1 Day (i.e. weighted average traded price of last 30 minutes).”
“Average iNAV of the last 30 minutes on T-1 Day.”
“Closing NAV of T-1 Day (if available).”
This change is expected to narrow the gap between ETF prices and their indicative NAV (iNAV), which is expected to improve market efficiency and reduce arbitrage distortions.
Manual Adjustments Raise Operational Risks
The consultation paper also flagged operational vulnerabilities under the current system, especially in adjusting for corporate actions.
“Currently, corporate actions, such as bonus, dividends, etc. effective on T-1 Day, are being adjusted manually in the T-2 Day closing NAV for the purpose of determination of the base price. This manual process increases the risk of errors and omissions of certain corporate actions,” Sebi said.
Automating the process through updated pricing references could, therefore, reduce both calculation risks and reconciliation mismatches.
Sebi Proposes To Replace Existing ±20% Price Band
Sebi also proposed to replace the existing fixed price band of ±20 per cent for most ETFs with a more calibrated, volatility-sensitive structure.
The regulator said that the current framework “does not appropriately reflect the permissible movement and volatility of the underlying, and therefore, may lead to situations where the ETF’s trading range is excessively wide relative to the underlying.”
Proposed Structure:
Equity and Debt ETFs: Initial price band of ±10 per cent, with the ability to flex up to ±20 per cent during the trading day after a cooling-off period.
Commodity (Gold and Silver) ETFs: Initial band of ±6 per cent, expandable in stages subject to market movement and cooling-off intervals.
Overnight/TREPs ETFs: Existing ±5 per cent band to continue unchanged.
Sebi’s data analysis showed that more than 99.80 per cent of ETFs in the equity and debt segments recorded daily movements of within 10 per cent, indicating that a narrower initial price band would be sufficient to capture most market movements.
Special Treatment for Gold and Silver ETFs
The regulator highlighted that commodity ETFs, particularly those linked to gold and silver, face unique challenges because the underlying commodities trade globally beyond Indian market hours.
“Considering the recent high volatility … in gold and silver prices in the domestic/international market, the existing price bands … had become inadequate to ensure alignment of their market prices with the underlying assets,” Sebi said.
To better align domestic ETF pricing with international commodity movements, Sebi proposed the following:
Flexible price bands linked to derivative market limits.
A potential separate pre-open session for commodity ETFs to discover an equilibrium price before regular trading begins.
The regulator has specifically sought feedback on whether the current upper cap should be removed to mirror daily price limits applicable to commodity derivatives.
What It Means for Investors
If implemented, the proposed changes could narrow the gap between ETF prices and their underlying assets and reduce unusually wide trading ranges caused by outdated reference prices. The move is also expected to improve transparency by minimising manual NAV adjustments, thereby lowering operational risks.
Further, a more responsive pricing framework could allow ETFs, particularly gold and silver ETFs, to react faster to movements in global commodity markets.
