August 7, 2025 | New Delhi – In a significant move aimed at enhancing liquidity and investor confidence in exchange-traded funds (ETFs), the Securities and Exchange Board of India (SEBI) has introduced a comprehensive framework for ETF buybacks. This initiative marks a critical step toward strengthening the overall ETF ecosystem in India and ensuring greater transparency and efficiency in the secondary market.
Exchange-Traded Funds (ETFs) are investment funds traded on stock exchanges, much like individual stocks. They track an index, commodity, sector, or asset and are considered a low-cost and efficient investment vehicle for retail and institutional investors. Despite their popularity, certain ETFs often face liquidity issues in the secondary market, leading to pricing inefficiencies.
Under the new framework, SEBI has laid down clear guidelines and operational procedures that will allow Asset Management Companies (AMCs) to buy back units of ETFs under specific conditions. Here are the core components:
Eligibility for Buybacks
AMCs can initiate buybacks if the ETF experiences low liquidity in the secondary market, or if the price significantly deviates from the Net Asset Value (NAV). Buybacks can be conducted either through the exchange platform or directly with investors, subject to SEBI's conditions.
Trigger Conditions
SEBI has defined quantitative parameters that would trigger a buyback. For example, if the average daily trading volume of an ETF falls below a defined threshold over a certain period, or if the discount/premium to NAV exceeds prescribed limits.
Disclosure Requirements
AMCs must disclose the details of buyback operations, including the rationale, buyback size, and method, on their website and to the stock exchange. Regular reporting is also mandated to maintain investor transparency.
Investor Protection
SEBI has emphasized that the buyback process must be equitable and not favor any specific group of investors. Moreover, buybacks should not be used to artificially manipulate ETF prices or performance metrics.
Role of Market Makers
The framework also encourages the participation of market makers to support liquidity, with SEBI requiring designated entities to play a more proactive role in maintaining tight bid-ask spreads.
The mutual fund and investment community has broadly welcomed SEBI's move. Experts believe this framework will:
Reduce illiquidity concerns, especially for sectoral or thematic ETFs.
Promote investor trust in ETFs as a reliable investment product.
Help AMCs better manage demand-supply mismatches and align ETF prices with NAVs.
Ajay Tyagi, former SEBI Chairman, commented, “This step is crucial in maturing India's ETF market. It brings our practices closer to global standards and empowers both investors and fund houses to operate with greater confidence.”
With the ETF market in India growing steadily, driven by increasing retail participation and government disinvestment via ETF routes, SEBI’s buyback framework is timely. It is expected to boost volumes, improve price discovery, and reduce the tracking error that plagues several thinly traded ETFs.
As this framework gets implemented, SEBI will monitor its impact and may refine the norms further, based on market feedback and emerging trends.
Conclusion
SEBI's new framework for ETF buybacks represents a progressive policy intervention aimed at nurturing India's rapidly evolving passive investment landscape. By addressing liquidity and pricing concerns, it sets the stage for deeper and more resilient ETF markets in the years to come.