The base price for applicability of price bands for ETFs is taken by exchanges as the Net Asset Value (NAV) on T-2 day, instead of the closing price on T-1 day, as in the case of indices and individual scrips.
“The existing fixed price band of +20% for all ETFs (except overnight ETFs), irrespective of their underlying/benchmark, does not appropriately reflect the allowable movement and volatility of the underlying asset and may therefore lead to situations where the trading range of the ETF is excessively wide in relation to the underlying asset,” Sebi said in a discussion paper.
The closing NAV of ETFs generally differs between T-1 and T-2 closings. Accordingly, the existing practice of using the T-2 Day closing NAV for determining the base price for ETFs results in an inherent lag of one trading day in the base value used for applying price bands, Sebi said.
Also, corporate actions such as bonuses and dividends in effect on T-1 day are manually adjusted to the closing NAV of T-2 day to determine the base price. This manual process increases the risk of errors and omissions from certain business actions, the report said. Moreover, the existing fixed price margin of 20% for ETFs, other than overnight ETFs, may not be proportional to the maximum permissible price range of the underlying asset, which depends on the closing price on T-1 day, Sebi added.
The regulator has proposed that the base price on T-day could be the closing price of ETFs on T-1 day, based on the weighted average trading price of the last 30 minutes, or an average iNAV of the last 30 minutes on T-1 day, or the closing NAV of T-1 day.
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