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| No commodity to enter ETF until govt takes call |
| Anindita Dey / Mumbai Sep 15, 2011, 00:45 IST |
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It will now take a while for a commodity to enter as an exchange-traded fund (ETF) into the capital or commodity markets. The government is taking a final view on the jurisdiction of commodity-based ETF.
The exercise follows an informal understanding between the Forward Markets Commission (FMC) and the Securities and Exchange Board of India (Sebi) over the issue. According to official sources, Sebi has agreed not to permit trading of any other commodity ETFs or even price these privately for public subscription, while FMC has decided to stop firing on the regulation and jurisdiction issues of commodity-based ETFs.
As a result, investors could only get to enjoy the gold ETFs that are already in the market. “Since the gold ETFs have already received subscription, scrapping them at this stage will be hazardous for the investors,” said an official source. In fact, both regulators have sought a legal opinion from the Union law ministry on this issue.While the regulation aspect of commodity-based ETFs is being challenged since 2007, a fresh round of turf war between the two started this year, when the commodity futures market regulator again raised the issue.
A few months ago, it asked Sebi to check any further listing of any commodity asset-based ETFs, especially the gold ones.
Gold ETFs are currently under Sebi’s purview. The move followed a swift growth in assets under the management of gold-based ETFs. While Sebi regulates gold ETFs since their inception in 2007, FMC believes it should monitor these. Logic: the underlying asset is a commodity. These were given to Sebi for monitoring, as they are sold as financial instruments — like mutual fund units. This year, FMC even chose to write to mutual funds and other entities seeking investment details in gold-based ETFs or other commodities or bonds linked with commodity prices.
Gold ETFs come in various forms. There are exchange-traded funds, close-ended funds and exchange-traded notes (that aim to provide a security note that track the price of gold). Mutual funds dealing in gold ETFs buy gold with investors’ money (on behalf of investors) and convert these into units.The units of old ETFs can be bought or sold on the stock exchange, just like the shares of companies. The daily net asset value of gold ETFs is decided by the price of gold. While retail investors can only exchange their units for cash and not physical gold, large investors can get the units of the gold ETF redeemed directly from the asset management company and get the equivalent amount of physical gold.
India, the official added, has asset-based jurisdiction — capital market products with Sebi, interest rates and currency with the Reserve Bank of India and commodities with FMC.
Even if ETF is a security, it eventually is gold-based paper, which affects demand and supply and, thus, pricing of the commodity. As on the end of 2010-11 fiscal, the number of folios under ETFs, including gold-backed ones, had grown 130 per cent to 4,42,000 units, while assets had expanded 170 per cent to Rs 6,916 crore.
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