What Sebi’s new ETF proposals mean

The Securities and Exchange Board of India (Sebi) on Friday proposed sweeping changes to exchange traded funds (ETFs), aimed at eliminating a critical "pricing lag" that leaves investors exposed during volatility.

- Apoorva Ajith

In a consultation paper that’s open for comments until 6 March, Sebi suggested shifting the base price calculation for ETFs from a two-day-old value to the previous day's data.

Mint explains what it means:

Sebi suggested that instead of using the net asset value (NAV) from two days earlier (T-2) to set price bands for ETFs, exchanges should use data from the previous trading day (T-1). To decide the base price for the next trading day, it has proposed three options— the ETF’s closing market price on TI (based on the average traded price in the last 30 minutes), the average indicative NAV (INAV) during the last 30 minutes of Tl, or the closing NAV of T-1, if available.

NAV is the per-unit value of a mutual fund or ETF, calculated by dividing the total value of its underlying assets, after expenses, by the number of units outstanding. For stocks, the base price for applying price bands is the T-1 close.

Sebi also suggested reviewing the current price bands for ETFs. At present, most ETFs are allowed to rise or fall by up to 20% in a day, while overnight ETFs have a tighter limit of 5%.