ETF Pricing In India: SEBI’s Proposed Change And What It Means For Investors

Exchange Traded Funds (ETFs) bridge the gap between equity and mutual funds. Like mutual funds, these investments have a wide asset portfolio, but they are traded like shares on stock markets. Therefore, not only do they have a Net Asset Value (NAV) that depicts the true value of an ETF based on the value of its underlying assets, but they also have a market price at which an ETF trades on the stock exchange. A closer alignment, or a lesser gap between market price and NAV, implies fair cost, optimal risk, and overall quality investment.

However, ETF pricing in India is currently prone to persistent wide gaps between the two metrics. This has resulted in SEBI issuing a consultation paper on 13 June 2026¹. SEBI wants tighter ETF bands, replacement of the pricing framework, and more. This blog decodes the changes suggested by SEBI for ETF pricing in India to help investors understand the proposed modifications and their impact.

How ETFs Are Currently Priced

Before diving into the meaning and significance of the SEBI ETF pricing change, we must first understand how ETF prices are currently calculated. Discussed below are the key aspects of ETF pricing.

Net Asset Value of ETF: The NAV of an ETF indicates the per-unit intrinsic value of an ETF. The formula for NAV is given below.

For example, if an ETF holds INR 1,000 crore worth of stocks and INR 5 crore in cash. Moreover, there are liabilities worth INR 2 crore and 100 crore ETF units are in circulation. The NAV in this case is given below.

The NAV calculation of an ETF is based on the following components.

1. Market value of underlying components
2. Cash and cash equivalents
3. Accrued income, like dividends or interest, from underlying assets
4. Liabilities and expenses that the ETF has to bear, like fund management fees, administrative expenses, etc.

Therefore, through this holistic approach, an NAV indicates the true value of an ETF. In contrast to mutual funds, ETFs do not just deal in NAV. 

• Market Value of an ETF: 

It has a market price as well, which is established by supply and demand as it trades on the stock exchange. The ETF is selling at a premium if the market price exceeds the NAV. The ETF would be trading at a discount in an opposite scenario. 

An ETF's market price and NAV should ideally stay close. Through a process known as arbitrage, which is carried out by specialised organisations, this alignment is preserved. 

• Arbitrage and Authorised Participants: 

Arbitrage is performed by large financial institutions approved by the ETF’s asset management company, called the Authorised Participants (APs), like banks, brokers, market makers, etc. ETF units cannot be created or redeemed directly by retail investors; therefore, it is done through the APs.

Suppose an ETF is trading at a premium; its NAV is INR 100, and the market price is INR 103. The AP will buy the underlying stocks at INR 100 and deliver them to the ETF issuer. In return, newly created ETF units are given to the APs. The AP will then sell the ETF units in the market at INR 103, making a profit of INR 3. The market price will decline as supply rises, and the NAV will approach the market price. 

In contrast, if an ETF is trading at a discount, suppose the market price is INR 97, and the NAV is 100, the AP will buy ETF units from the market at INR 97, and redeem them, receiving underlying securities worth INR 100. They sell these securities in the market to earn a profit of INR 3. In doing so, demand for ETFs rises, its market prices rise and move closer to the NAV.

However, despite this arbitrage mechanism, ETF NAV and market price witness persistent gaps in India due to certain structural issues.

Why Mispricing Happens

Discussed below are different reasons that result in the mispricing of ETFs.

1. Outdated Reference Pricing: Since an ETF trades on the stock market, it requires a reference price point to set the daily price bands or the maximum percentage limits within which an ETF is allowed to rise or fall during a trading session. For example, if the base price of the day is INR 100 and the price band is ±10%, the ETF cannot trade over INR 110 or below INR 90. The prior closing NAV and market price are used to calculate the base price. However, currently in India, the base price used to generate ETF price bands and reference values is frequently the NAV from two trading days ago (T-2)². In the case of fast-moving markets, ETF prices can swing way farther from their true value since the base price is two days old and does not depict true market dynamics.

2. Fixed Price Bands: In India, most ETFs have a standard ±20% price band that limits their daily price fluctuations³. This fixed band is based on historical NAV data and may not accurately reflect real market volatility, particularly for commodities such as gold and silver, which trade internationally while Indian markets are closed. Moreover, this uniform price band does not take into account the unique market dynamics of different underlying ETF assets.

3. Operational Issues: Corporate activities such as dividends and stock splits are manually adjusted in the previous T-2 NAV, which increases operational risk and mistakes.

4. Liquidity and Supply Constraints: Many niche and international ETFs do not have sufficient buyers and sellers, resulting in low liquidity. This further creates a wider gap between their NAV and market price.

To address these factors that cause mispricing of the ETFs, SEBI has put forward a consultation paper.

What SEBI Wants To Change 

SEBI has acknowledged the structural difficulties facing the Indian ETF market and issued a consultation document recommending a redesigned framework to address them. This consultation procedure seeks feedback from the public before final rules are established. The suggested changes are discussed below⁴.

1. T-1 NAV ETFs: SEBI wants the base price of day T to be calculated based on T-1, rather than T-2, to allow a more contemporary reference point. To do this, the base price is proposed to be calculated on either of the following parameters.

• The closing market price on T-1 can be determined by the weighted average of the past 30 minutes.
• Average Indicative NAV of last 30 minutes on T-1. The indicative NAV here refers to the real-time NAV estimate that is determined and updated constantly throughout market hours based on the most recent underlying asset values. 
• The latest available iNAV.

2. ETF Price Band Changes: Rather than a one-size-fits-all approach, where most ETFs have a ±20% price band and overnight ETFs investing in Tri-Party Repo Securities (TREPs) have ±5%, SEBI now wants to create a dynamic band that varies based on asset type. Discussed below are the suggested changes.

• Equity and debt ETFs are expected to start with a ±10% and can expand to ±20% with cooling periods and minimum trade thresholds.
• Commodity ETFs like gold and silver can start with ±6% and then expand in stages, while an aggregate daily price limit can be applied to commodity derivatives.
• SEBI wants tighter ETF bands on overnight ETFs to remain at the existing ±5%
• Furthermore, SEBI has inquired if the ±20% cap should exist.

3. Optional Pre-Open Sessions: Commodities like gold and silver trade in international markets, resulting in movements throughout the day, while corresponding ETFs in India trade only during market hours of 9:15 a.m. to 3:30 p.m. Therefore, SEBI has inquired if there should be a dedicated pre-open session that would facilitate better alignment with global prices.

SEBI has given time till 6 March 2026 for feedback on the suggestions. Subsequently, it is now necessary to look at the pros and cons of this paper.

Pros And Cons Of SEBI’s Consultation Paper

The table below gives a comparative analysis of the current pricing framework and the proposed framework to facilitate easier pro and con analysis.

Thus, the proposed strategies of SEBI can have the following benefits.

• a smaller difference between NAV and market pricing.
• Reduced tracking error, meaning less drift of ETF performance compared to its underlying assets.
• Improved liquidity, resulting from dynamic price bands.
• Better handling of volatile assets like gold and silver.
• Reduced the operation risk posed by manual work.

However, there might be some challenges as given below.

• Implementing a shift to T-1 would require stock market and technology updates.
• Dynamic price bands can increase intraday volatility.
• There might be transitional glitches for market participants.

Conclusion

The assets under management of Indian ETFs have grown 5.5 times in the last 5 years, while the retail folio has grown 11 times⁵. Amid this growth trend, the suggested SEBI overhaul of the Indian ETF pricing framework can further sophisticate the market. However, the transition period might be prone to challenges for participants. Therefore, diversification into low to medium-risk, fixed-return assets like bonds and high-yield FDs can help maintain portfolio stability.

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FAQs

1. What is ETF NAV, and how does it differ from price?

The NAV of an ETF indicates the per-unit intrinsic value of an ETF. It is determined by dividing the total value of the underlying ETF assets by the number of ETF units that are currently in circulation. However, the market price is the price at which an ETF trades in the stock market and is determined by the demand and supply forces.

3. Why is SEBI proposing a change in ETF pricing structure?

The current ETF pricing structure results in a consistent gap between the NAV and the market price of an ETF. Therefore, SEBI is proposing changes in the structure of ETF pricing.

3. Will ETF investments become safer with these changes?

The changes are expected to improve pricing accuracy and market efficiency, which reduces the risk of buying or selling at distorted prices. However, there might be challenges and volatility during the transition. 

References:

1. Outlook money, accessed from: https://www.outlookmoney.com/invest/sebi-consultation-paper-on-etfs-new-pricing-bands-to-curb-mispricing-what-it-means-for-investors

2. Money control, accessed from: https://www.moneycontrol.com/news/business/markets/sebi-wants-closer-to-market-nav-for-etfs-proposes-revamp-of-base-price-and-price-band-framework-13828010.html/amp

3. Money control, accessed from: https://www.moneycontrol.com/news/business/markets/sebi-wants-closer-to-market-nav-for-etfs-proposes-revamp-of-base-price-and-price-band-framework-13828010.html/amp

4. Money control, accessed from: https://www.moneycontrol.com/news/business/markets/sebi-wants-closer-to-market-nav-for-etfs-proposes-revamp-of-base-price-and-price-band-framework-13828010.html/amp

5. ET, accessed from: https://economictimes.indiatimes.com/markets/stocks/news/indias-etf-aum-jumps-5-5x-in-5-years-retail-folios-surge-11x-zerodha-fund-house/articleshow/122198688.cms

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