The rule that set premiums free

Summary: SEBI's new price-band rule was meant to keep ETF prices near NAV, but for international ETFs that can't create new units, it removed the old 20 per cent ceiling on premiums instead, while the underlying index barely moved.

Summary: SEBI's new price-band rule was meant to keep ETF prices near NAV, but for international ETFs that can't create new units, it removed the old 20 per cent ceiling on premiums instead, while the underlying index barely moved. Between September 4 and September 9, the Nasdaq Q-50 index went nowhere. The Motilal Oswal Nasdaq Q50 ETF, which owns exactly those 50 companies, rose 50 per cent. Same shares. How? An ETF (exchange-traded fund) has two prices: the NAV (net asset value), what its shares are worth, and the market price, what the last buyer paid. Normally both match, because if the price drifts above NAV, a market maker gets fresh units from the fund house at NAV and sells them until the gap closes. Creating units is what keeps an ETF honest. For international ETFs, that mechanism is switched off. India lets its mutual funds hold only  $7 billion abroad, with a separate $1 billion pool for overseas ETFs. The pool filled in April 2024, and since then, no fund house has been able to create new units. Mirae Asset shut down direct subscriptions in January 2024 and says market makers still cannot create new units; Motilal Oswal is in the same position. So, the old units are all there is. Buyers keep coming, because the FoFs (fund of funds) that invest abroad have shut one by one, and because a price that rises three days running attracts people who buy whatever is rising. Fixed supply, growing demand and the price floats above NAV. That gap is the premium: a shortage charge,