01 Read
What happened
SEBI's revised framework for exchange-traded funds (ETFs) came into force on 7 September 2025, overhauling how ETFs are traded on Indian exchanges. The framework introduces enhanced market-making obligations, tighter bid-ask spread requirements, and strengthened liquidity mechanisms to improve price discovery and reduce tracking error. The move aims to bring Indian ETF market structure closer to global standards and deepen retail participation in passive investment products regulated under SEBI's mutual fund and collective investment framework.
02 Understand
Why it matters
Exchange-traded funds are hybrid instruments: they are structured like mutual funds (pooled, NAV-based, regulated by SEBI under the SEBI (Mutual Funds) Regulations, 1996) but trade on stock exchanges like equities throughout the day. This dual nature creates a unique liquidity challenge — the on-exchange price can deviate from the underlying Net Asset Value (NAV), creating tracking error and arbitrage gaps that harm retail investors.
SEBI's revised framework addresses this by strengthening the market-maker ecosystem. Market makers (also called Authorised Participants or APs) are intermediaries obligated to continuously quote buy and sell prices, keeping the ETF's market price close to its iNAV (indicative NAV). Under the new rules, the obligations on these APs are made more stringent — minimum quoting time, maximum permissible spread, and penalty mechanisms for non-compliance.
The framework also touches on creation and redemption mechanisms (the in-kind basket process that keeps ETF prices anchored to NAV), enhanced disclosure requirements, and possibly new category-specific rules for debt ETFs, gold ETFs, and index ETFs.
For SEBI Grade A aspirants, the key regulatory anchors are: ETFs are regulated as mutual fund schemes; SEBI (Mutual Funds) Regulations 1996 governs them; Authorised Participants and Market Makers are the key intermediaries; and SEBI has the power to issue circulars revising trading frameworks. The effective date — 7 September 2025 — is a high-specificity data point of the kind SEBI examiners routinely test.
SEBI's revised framework addresses this by strengthening the market-maker ecosystem. Market makers (also called Authorised Participants or APs) are intermediaries obligated to continuously quote buy and sell prices, keeping the ETF's market price close to its iNAV (indicative NAV). Under the new rules, the obligations on these APs are made more stringent — minimum quoting time, maximum permissible spread, and penalty mechanisms for non-compliance.
The framework also touches on creation and redemption mechanisms (the in-kind basket process that keeps ETF prices anchored to NAV), enhanced disclosure requirements, and possibly new category-specific rules for debt ETFs, gold ETFs, and index ETFs.
For SEBI Grade A aspirants, the key regulatory anchors are: ETFs are regulated as mutual fund schemes; SEBI (Mutual Funds) Regulations 1996 governs them; Authorised Participants and Market Makers are the key intermediaries; and SEBI has the power to issue circulars revising trading frameworks. The effective date — 7 September 2025 — is a high-specificity data point of the kind SEBI examiners routinely test.
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