Principally traded exchange

A share can be listed on both the BSE and the NSE at once, and its closing price on the two exchanges is rarely identical to the last decimal. For NAV purposes, a mutual fund cannot use both prices — it has to pick one.

That chosen exchange is the security's principally traded exchange. Once picked, the fund sticks with it for that security, so the same stock is not valued off a different exchange from one day to the next for no reason.

SEBI's valuation guidelines (Chapter 7, section 7.1) set the rule for dual- or multi-listed traded securities: value at the last quoted closing price on the exchange where the security is principally traded. The AMC chooses which exchange that is, but must record the reasons for the selection in writing — there is no objection to valuing all scrips at the prices of the exchange where the majority in value of the fund's investments are principally traded, as a matter of convenience.

Once an exchange is selected for a security, changing it later also requires the reasons to be recorded in writing — a principally traded exchange is not switched informally.

Two fallback rules handle gaps in trading on the selected exchange:

• If the security is not traded on the selected exchange on a particular valuation day, the value from another exchange where it did trade that day may be used.
• If the security is not traded on any exchange for 30 days before the valuation date, it must be treated as a non-traded security, valued in good faith under Board-approved methods instead.

A large-cap stock trades on both the BSE and the NSE. An AMC's debt-and-equity scheme holds this stock along with dozens of others, and the majority of the scheme's equity holdings by value are principally traded on the NSE.

The AMC records, in writing, that it will value all its equity holdings — including this stock — using NSE closing prices, citing the majority-value rule as its reason. On a day when the stock does not trade on the NSE at all but does trade on the BSE, the fund uses the BSE closing price for that one day, falling back to the other exchange rather than leaving the valuation stale.

Now suppose the stock stops trading on every exchange altogether — no NSE price, no BSE price, nothing — for 32 days running. Because that gap has crossed the workbook's 30-day limit, the AMC can no longer use a stale exchange price at all: it must now value the holding as a non-traded security, in good faith, under its Board-approved methods, until trading resumes.

Chapter 7 (Net Asset Value, Total Expense Ratio and Pricing of Units), section 7.1, sets out the valuation guidelines for traded securities immediately after the ten fair valuation principles. Expect a question on what happens when a security is not traded on the selected exchange for a single day versus for 30 days — the two trigger different responses.

• The AMC chooses the exchange, but must document its reasons in writing — this is not left to informal practice.
• A single non-trading day on the chosen exchange is not the same as 30 days of no trading anywhere. The first triggers a same-day fallback to another exchange; the second reclassifies the security as non-traded altogether.
• Changing the principally traded exchange also needs written justification — it is a documented decision each time, not a one-off choice made forever.
• This is a rule about valuation, not about where the AMC is required to route trades or hold the security.