The Securities and Exchange Board of India (SEBI) may allow the use of the latest available indicative net asset value (iNAV) of the previous trading day (T-1) as the base price for determining price bands for exchange-traded funds (ETFs), according to sources aware of the discussions.
At present, ETFs are subject to a fixed ±20 per cent price band, with the base price derived from the net asset value (NAV) of two trading days earlier (T-2). This is unlike individual stocks and indices, where price bands are applied on the previous day’s (T-1) closing price. The difference creates a mismatch between ETF prices and the movement in their underlying securities.
ETF is a mutual fund scheme that invests in securities in the same proportion as an index of securities (including bonds and metals) or any basket of securities in the case of activey managed ETFs, and the units are mandatorily listed and traded on exchange platform.
Data lag
Initially, SEBI was considering bringing ETFs on par with stocks and indices by using T-1 day NAV. However, exchanges flagged practical difficulties with using T-1 day NAVs as the data is published with a delay by the industry body AMFI, a source said.
For a trading session on any given day, exchanges currently download T-2 day NAVs from the AMFI website. In cases where a corporate action takes place on T-1 day, the base price is manually adjusted using the T-2 NAV, increasing the risk of errors or missed adjustments.
Hence, SEBI may permit exchanges to use the latest available iNAV of T-1 day as the base price for determining ETF price bands. The iNAV, which is calculated using the most recent traded prices of the underlying securities, is available during market hours and at the end of the day, making it operationally easier to use.
Latest NAV
The Association of Mutual Funds in India (AMFI) had earlier raised concerns about how the latest available iNAV may differ from the day-end NAV, which would be computed based on the last half an hour average trading prices of the underlying securities and would have other components such as expenses, information regarding daily purchase and sell etc.
“The idea is to have a base price that is closer to current market reality rather than one that is two days old,” another source said. “There is always a variation between the closing NAV of T-1 and T-2, which means the existing practice has a lag of one trading day.” The flat 20 per cent band, the person added, may also not be commensurate with the permissible price range of the underlying index or constituents.
The move is aimed at addressing the long-standing issue of a one-day lag in ETF price band computation and reducing operational challenges around corporate action adjustments. The regulator is yet to come out with a draft paper on the change. An email sent to SEBI for comments did not elicit a response.
SEBI is also considering changes to the price band structure for ETFs, another source aware of the discussions said. Instead of a uniform ±20% range, an initial ±10% band would apply, which could be flexed up to ±20% during the session, depending on the movement of the underlying index, and subject to a cooling-off period