SEBI Proposes Overhaul Of Gold And Silver ETF Price Bands After Sharp Swings

The market regulator has sought to curb extreme volatility in gold and silver Exchange Traded Funds (ETFs) by proposing changes to the base price and price band framework. Currently, there are no separate price bands for ETFs aligned with their underlying assets, making them vulnerable to sharp price movements.

The proposal comes after sharp volatility in gold and silver ETFs triggered by fluctuations in global commodity prices. On some days, these ETFs fell by over 15%, while on others, they recorded sharp gains.

Stock exchanges currently apply a fixed price band of plus or minus 20% on the base price of ETFs, except for Overnight ETFs investing only in TREPs, which have a price band of plus or minus 5%.

Moreover, the base price for applying price bands

to ETFs is taken as the T-2 day closing Net Asset Value (NAV) by exchanges, instead of the T-1 day closing NAV or price, as is the case with indices and individual stocks. This creates a challenge, as the closing NAV of ETFs typically differs between T-1 and T-2 days. Corporate actions such as bonuses and dividends are adjusted manually, increasing the risk of errors.

What Are the Key Proposals?

SEBI has proposed that the base price be determined using either the closing price of the ETF on T-1 day (weighted average price of the last 30 minutes), the closing NAV of T-1 day, or the average indicative NAV (iNAV) of the last 30 minutes of T-1 day.

Further, the regulator has proposed an initial price band of plus or minus 10% for equity and debt ETFs, which can be flexed up to plus or minus 20%. A cooling-off period of 15 minutes will apply, and up to two flexes will be allowed in a day.

For gold and silver ETFs, the regulator has proposed an initial price band of plus or minus 6%, which can be flexed up to plus or minus 20%. This will also include a 15-minute cooling-off period.