India to Reform ETF Settlement
India's markets regulator, SEBI, is pushing for reforms to address the two-day lag in Net Asset Value (NAV) calculations for gold and silver ETFs. The regulator flagged the persistent misalignment between market prices and ETF NAVs, which creates market inefficiencies. This move signals a potential shift in settlement timing or NAV calculation rules for commodity funds.
- The proposed reform stems from the current use of the T-2 day (two trading days prior) closing Net Asset Value (NAV) to determine the base price for setting ETF price bands. This lag was particularly problematic during high volatility in gold and silver in late January 2026, when existing price bands proved inadequate to keep ETF prices aligned with their underlying assets. - To address the lag, the Securities and Exchange Board of India (SEBI) is considering several T-1 (previous day) metrics for the base price, including the ETF's weighted average traded price in the last 30 minutes of the T-1 session, the average indicative NAV (iNAV) over the same period, or the closing NAV from T-1. - The current uniform ±20% price band for most ETFs will be replaced by a dynamic, multi-tiered system. For equity and debt ETFs, an initial ±10% band is proposed, which can be flexed up to ±20% after a cooling-off period. - Gold and silver ETFs will have a tighter initial price band of ±6%, which can be expanded in increments of 3% up to a maximum of 20%. Exchanges may relax the band further if international price movements in the underlying commodities exceed the daily limits set for commodity derivatives. - A key operational risk of the T-2 system is the manual process required to adjust for corporate actions like dividends and bonuses that become effective on the T-1 day, which introduces potential for errors and omissions. - In addition to the NAV calculation changes, SEBI has proposed introducing a dedicated pre-open session for gold and silver ETFs to improve price discovery at the start of trading, accounting for price movements in global markets that trade around the clock. - The proposal is detailed in a formal consultation paper released on February 13, 2026, with public comments solicited until March 6, 2026, indicating a deliberative approach to finalizing the new regulations. - This ETF reform aligns with India's broader market infrastructure enhancements, including the successful nationwide shift to a T+1 settlement cycle for equities, aimed at increasing efficiency and reducing settlement risk.
