I have a piece with Sudarshana Basu in the Financial Express arguing that the recent circular by the exchanges and SEBI barring brokers from offering gold products as an agent are both undesirable and contrary to the law. SEBI needs to revisit the issue.
Here is a readable version:
Why stock exchange members can’t distribute digital gold
SEBI’s concerns may have stemmed from lack of regulatory oversight as digital gold doesn’t fall within the purview of ‘securities’ as per the Securities Contracts Act
Through recent circulars issued by the NSE and the BSE, members of exchanges have been prohibited from distributing digital gold on their platforms from September. The missive comes on the back of SEBI writing to exchanges, asking them to do so on the basis that the activity violates Rule 8(3)(f) of the Securities Contracts (Regulation) Rules, 1957. A quick look at SCRR suggests it was formed to safeguard the net worth of the broker from erosion by risking it in other businesses. SCRR essentially allows a broker to conduct non-securities services business “except as a broker or agent not involving any personal financial liability.”
Currently, digital gold is sold to customers primarily by three vendors—Augmont Gold Ltd, MMTC-PAMP India and Digital Gold India Pvt Ltd—through various platforms and e-wallets such as Amazon Pay, Google Pay, as well as fintech brokers such as Paytm Money, Groww, Upstox and traditional broking entities like Motilal Oswal. These platforms, which allow customers to buy 99.99% pure gold at ticket sizes as low as `1, offer a flexible option to investors to buy and sell gold with a few clicks from the comfort of their homes. Especially during the pandemic, when access to shops for buying physical gold was restricted, the digital gold market witnessed a surge in demand amongst customers. Moreover, these platforms allow customers to buy gold without worrying about storage costs or assurance of quality, as the same is mostly taken care of by the seller.
While digital gold has gained traction amongst retail investors as a viable and secure investment option offering ease of access and liquidity, it is interesting to note that the product is neither regulated by SEBI nor RBI. It, thus, appears that SEBI’s concerns may have stemmed from a lack of regulatory oversight since digital gold currently does not fall within the purview of ‘securities’ as per the Securities Contracts (Regulation) Act, 1956. Further, as per Rule 8(3)(f) of the SCRR, as referred to in the circular, members are not permitted to engage as a principal or an employee in any business other than of securities or commodity derivatives, except as a broker or agent not involving personal financial liability. However, even if gold is not considered securities, the exception clearly allows these platforms to offer the gold subject to (1) acting as agents (2) not incurring financial losses because of such activity. Almost all activities clearly fall within the exceptions stated in the rules and have, therefore, befuddled market participants.
Several broking entities have decided to stop distributing digital gold on their platforms, which means that, going forward, investors could either exit their investment or directly transact with the seller. Non-members—for example, e-wallets such as Google Pay, etc—are not impacted by the circular.
It is worthwhile to note that typically while distributing digital gold, these online platforms facilitate the purchase, sale and delivery of physical gold to customers in partnership with gold sellers. Thus, members distributing digital gold on their platforms merely act as agents facilitating the purchase and sale of digital gold between the vendor and the investor, and the said process does not involve any personal financial liability of members. Once an investor completes the KYC process and purchases an order on the platform, an equivalent amount of gold is purchased on behalf of the investor at the prevailing market rates and stored in allocated vaults which are insured by the seller. After this, the investor can opt for redemption with doorstep delivery or sell it on the platform.
In the above scenario, unless the member actually acquires title over the gold purchased on behalf of the investor, or the gold is actually bought or sold by the member in its own name, it cannot be said that the member acts as a principal or an employee or in any capacity which involves personal financial liability. Evidently, in such circumstances, the aforesaid activity would fall within the scope of exception provided under Rule 8(3)(f) of SCRR which allows members to act in the capacity of a broker or agent while engaging in activities other than of securities or commodity derivatives.
Secondly, digital gold offered through these platforms is sold by trusted vendors and backed by actual physical reserves maintained in secure facilities. In such transactions, the investor is also made aware that the member is acting as an agent and not as a principal seller of gold. Moreover, these platforms make it easy and convenient for investors to resell their gold holdings at current market value and offer seamless transfer of funds to their registered bank account. Therefore, any concern with respect to potential misuse of the client’s funds by such entities can be ruled out.
Historically, gold has been viewed as a favourable investment option by Indian investors during market volatilities. In its Union Budget announcement for FY22, the finance ministry had proposed for the establishment of regulated gold exchanges, with SEBI being the sole regulator, marking a shift towards financialisation of gold. Thus, gold will likely now fall within the definition of ‘securities’, though this has not yet been carried out.
With the digital gold market having built a momentum towards establishment of a transparent market ecosystem for gold, the new restrictions are likely to hinder financialisation of the asset, a stated objective of the government. Not only this, but the above restrictions can also potentially disrupt the rising demand for digital gold, ahead of the upcoming festive season, as the same may lead to scepticism amongst investors regarding the legitimacy of the product. Most importantly, the restrictions based on an interpretation of a government rule are incorrect and need to be withdrawn.
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