Gold, Silver ETFs may see new base price and price band rules as SEBI floats consultation paper

Heightened volatility in gold and silver prices and operational concerns in determining the base price of exchange-traded funds (ETFs) have prompted the Securities and Exchange Board of India (SEBI) to review the price band framework applicable to ETFs.

The market regulator has issued a seven-page consultation paper titled “Consultation Paper on Review of provisions related to Base Price and Price Bands for Exchange Traded Funds (ETFs)”, proposing changes to the regulatory framework governing base price and price bands for ETFs, including gold and silver ETFs.

The paper evaluates the current mechanism for determining base price and the applicability of price bands, and invites public comments on the proposed changes.

Review of provisions related to base price

The base price serves as the reference price for ETFs at the commencement of trading and plays a critical role in price discovery on stock exchanges. SEBI has examined the existing framework in light of market functioning and trading dynamics, particularly for commodity-based ETFs such as gold and silver.

The consultation outlines the regulatory background and operational aspects of how the base price is currently determined, and seeks views on whether modifications are required.

What is ETF?

An ETF is a mutual fund scheme that invests in securities in the same proportion as an index, and its units are mandatorily listed and traded on an exchange platform. Gold ETFs and Silver ETFs invest primarily in gold or gold-related instruments, and silver or silver-related instruments, respectively.

Since ETFs trade like individual scrips, they are subject to price bands. Currently, individual scrip-wise price bands of up to 20% on either side apply to all scrips in the rolling settlement, except those with derivative products.

What is the price band in the case of ETFs at present?

No separate price band structure has been prescribed specifically for ETFs by SEBI. Stock exchanges apply:

• A fixed price band of ±20% on the base price of ETFs

• A ±5% price band for Overnight ETFs investing only in TREP

How is the base price currently determined?

For individual scrips and indices, the T-1 Day closing price/NAV is used. However, in the case of ETFs:

• The T-2 Day closing NAV is taken as the base price for applying price bands

This results in a one-day lag in the reference value used for price band calculations.

Why is this being reviewed?

SEBI has identified several issues:

• Since ETF closing NAVs typically differ between T-1 and T-2, using T-2 NAV may not accurately reflect current market conditions.

• Corporate actions effective on T-1 are manually adjusted in the T-2 closing NAV for base price determination, increasing the risk of operational errors.

• The fixed ±20% band (±5% for Overnight ETFs) may not reflect the volatility of the underlying assets. This could lead to ETF trading ranges that are either excessively wide or inconsistent with the benchmark’s permissible movement.

Commodity ETF volatility concerns

Public comments invited

SEBI has invited comments from stakeholders and market participants on the proposals. The feedback will be considered before any regulatory amendments are finalised.

The move signals a broader review of trading safeguards and pricing mechanisms applicable to ETFs in the Indian securities market.

Disclaimer: This article is written purely for informational purposes and should not be considered investment advice from Upstox. Investors should do their own research or consult a registered financial advisor before making investment decisions.