The Securities and Exchange Board of India’s latest mechanism for determining the closing prices of certain stocks through a single equilibrium-price auction, replacing the final volume-weighted average price (VWAP), is creating a pricing challenge for exchange-traded funds (ETFs).
Sebi’s 3 August closing auction session (CAS), as of now, covers only 213 derivative-traded stocks. These stocks stop continuous trading at 3:15pm, while others continue trading until 3:30pm. For ETFs holding both, this is creates a mismatch in the prices used to value their underlying portfolios.
As a result, the indicative net asset value (iNAV), which reflects the real-time value of an ETF’s holdings and, for equity ETFs, must be updated with a maximum 15-second lag from the underlying market, can become distorted.
For example, only three of the top 10 holdings of the SBI Nifty Smallcap ETF—Delhivery, Central Depository Services Ltd and RBL Bank—are eligible for CAS. The remaining seven, including Sona BLW Precision Forgings, Karur Vysya Bank and Navin Fluorine International, continue to be valued using the VWAP.
“The iNAV plays an important role in providing transparent pricing to investors every few seconds to assist them in trading in ETFs. Investors will eventually stop trading in ETFs between 3:15pm and 3:30pm if they cannot see accurate pricing,” said a mutual fund official on condition of anonymity.
"This problem is likely to continue till the time all stocks are brought under CAS,” added another mutual fund executive on condition of anonymity.
The issue follows repeated representations to the markets regulator on the impact of the CAS on ETF pricing since consultations on the mechanism began. Mint's query emailed to Sebi remained unanswered.
ETFs have garnered assets worth ₹11.71 trillion as of July 2026, up 28% year-on-year.
The price distortion
Sebi's CAS determines a single price at which the maximum number of pooled orders for a stock can be matched. Auction orders are placed within a ±3% range around a volume-weighted reference price derived from trading between 3pm and 3:15pm.
For securities not covered by CAS, the closing price continues to be determined by the VWAP of trades executed in the last 30 minutes of the continuous trading session.
The difference matters for ETFs—funds that hold a basket of assets, such as stocks, and trade on a stock exchange like an ordinary share—because their portfolios can contain stocks that fall under both categories.
Consider an ETF holding three stocks: Stock A has a 40% weight, Stock B has a 35% weight, and Stock C has a 25% weight. At 3:15pm, their prices are ₹100, ₹200 and ₹400, respectively, giving the ETF an iNAV of ₹210. At this point, the iNAV accurately reflects the value of all three underlying holdings.
After 3:15pm, Stock A enters the closing auction and its price no longer updates continuously, while Stock B rises to ₹210 and Stock C falls to ₹390. The underlying basket is now worth ₹211, but because Stock A is effectively using a price from the beginning of the auction, the iNAV may not accurately reflect the value of all three underlying holdings.
For an ETF investor trading between 3:15pm and 3:30pm, this creates a mismatch between the ETF's market price and the iNAV.
The risk
The pricing issue also creates risks for market makers, who provide liquidity in ETFs. “Market makers prefer to hit the market when there are transparent, tradeable prices. CAS does not provide predictable trading prices, which makes it difficult for market makers to place quotes,” said Sanjeev Mohta, managing director at Kanjalochana Finserve Pvt. Ltd, which acts as a market maker for the ETF segment.
“Additionally, the market maker cannot approach the asset management company for buying or selling an ETF, as the AMC cannot execute the underlying basket of securities as 100% fill at fair market prices are not guaranteed, and creation or redemption requires 100% fill of the underlying basket. This puts a constraint on the market maker on the quantum of liquidity they can provide," he added.
Creation refers to exchanging the underlying basket of stocks for new ETF units, and redemption means exchanging ETF units for the underlying basket of stocks. Since both processes require the entire basket to be transacted, the AMC may be unable to complete them if some stocks cannot be bought or sold at fair market prices, limiting liquidity.