The Securities and Exchange Board of India (Sebi) has unveiled a consultation paper that proposes to bring sweeping changes to how physical gold and silver held by Exchange Traded Funds (ETFs) are valued. The proposal, open for public comment until 6 August, seeks to replace the current valuation system, which relies on international prices, with a simpler approach grounded in domestic market realities.
Currently, mutual fund houses managing gold and silver ETFs use the London Bullion Market Association (LBMA) price in US dollars as the benchmark. This price is then converted to Indian rupees and subjected to a host of adjustments—customs duties, local taxes, and variable premiums or discounts—to reflect Indian market conditions. This multi-layered process has given asset management companies (AMCs) leeway to use different sources and frequencies for making these price adjustments, resulting in a lack of uniformity in the valuation methods.
Sebi has now proposed that ETFs instead use spot prices for gold and silver published by Indian commodity exchanges like MCX. These prices are polled from a panel of domestic market participants—importers, traders, jewellers—and are meant to reflect real-time supply and demand within India.
Domestic benchmark
“Presently, different asset management companies (AMC) use different sources of domestic benchmark to apply necessary premium/ discount, which leads to non-uniformity of the valuation practice for gold and silver across the MF industry. Further, in the absence of any regulatory direction, AMCs use their discretion to apply premium/ discount resulting in differences in valuation of gold/ silver,” Sebi’s consultation paper highlighted.
There are various service providers/ index providers in India such as jeweller associations, commodities exchanges etc., which publish spot price of commodities including gold and silver under the domestic market condition, Sebi said.
“The commodity exchanges usually poll the spot prices of gold and silver on a daily basis and this price is used as reference price for physical market transactions in gold/ silver within India,” the Sebi paper highlighted.
Exchange Traded Funds, or ETFs, are mutual funds that are tradeable in the stock markets just like stocks. And just like a mutual fund, they track an index, sector, commodity or asset.
Surendra Mehta, national secretary at the India Bullion and Jewellers Association (IBJA), expressed reservations about Sebi’s proposal.
“Commodity exchange spot polling prices of gold and silver are declared at 4.30 pm daily only once in a day. Since the gold and silver market are internationally traded commodities and this market remains open 23 hrs a day, calculating gold and silver price based on particular Indian time can lead to a huge gap between international price and domestic spot price polled by exchange,” Mehta said, stressing that the ETF valuation price should be based on LBMA price only.
“Further, when the Reserve Bank of India (RBI) uses IBJA) price for issue and redemption of Sovereign Gold Bonds (SGB) and also for lending against jewellery, IBJA price can also be used for valuation purpose by ETF,” he added.
(with contributions from Ram Sahgal)