Sebi Overhauls ETF Trading Rules, Introducing Dynamic Price Bands

The Securities and Exchange Board of India (Sebi) has implemented a significant overhaul of the regulatory framework governing Exchange Traded Funds (ETFs), effective from September. The revised guidelines introduce dynamic price bands for ETFs, replacing the previous fixed-percentage limits. This change is designed to allow ETF prices to fluctuate more responsively to movements in their underlying assets, thereby improving price discovery and market efficiency. Under the new system, the previous fixed price bands of 10% or 20% for equity ETFs, and 5% or 10% for debt and commodity ETFs, will be abolished. Instead, dynamic price bands will be calculated based on a combination of factors, including the ETF's net asset value (NAV) and the price volatility of its constituents. This approach aims to reduce instances where ETF prices might diverge significantly from their intrinsic value due to static trading limits, especially during periods of high market volatility. Furthermore, Sebi has also revised the methodology for calculating the base price of ETFs. This adjustment is expected to provide a more accurate starting point for daily trading, contributing to better alignment between an ETF's market price and the value of its underlying portfolio. The regulatory body anticipates these changes will foster greater liquidity and tighter bid-ask spreads across equity, debt, and commodity ETF segments, ultimately benefiting investors through more efficient execution and pricing.