In a move that signals a fresh round of turf war between regulators, the Foward Markets Commission (FMC, the commodity futures market regulator, has again asked the Securities and Exchange Board of India (Sebi) to check any further listing of any commodity asset-based exchange traded funds (ETFs), especially gold ones.
Gold ETFs are currently under Sebi’s purview. The move follows swift growth in assets under management of gold-based ETFs.
In a letter last month to Sebi’s new chairman, the FMC has reiterated anxiety over such growth. The issue was raised last year, too, and then put aside upon higher intervention, said official sources.
While gold ETFs have been regulated by Sebi since their inception in 2007, the FMC believes it should monitor these, as the underlying asset is a commodity. These were given to Sebi for monitoring as they are sold as financial instruments, just like mutual fund units.
After FMC started arguing it should regulate commodity-based ETFs, Sebi has not cleared more of such proposals, where the underlying products were crude oil and silver.
This time, however, FMC intends to go beyond writing to Sebi. It proposes to also write to mutual funds and other entities seeking investments in gold-based ETFs or other commodities or bonds linked with commodity prices.
“We would ask them to immediately stop taking any further subscription to such ETFs, as this affects our regulation. While we control commodity trading, gold, or for that matter any commodity, cannot be an underlying based on which some other instruments are traded under some other regulatory jurisdiction. Ultimately, it creates a virtual demand which affects spot and futures prices,” said a senior FMC official.
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.
In its discussions with entities dealing with gold ETFs or bonds having returns linked with movement in gold prices, FMC says it found most of the funds floating bonds linked to the price of gold are collecting money through private placement, without the direct involvement of the exchange, sources added.
“Therefore, we propose to write, one to one, with all entities with ETFs to at least check further subscription and to stop proposals to float new ETFs. We have also alerted Sebi,” said an FMC source.
In India, he added, there was 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.
“The issue was clarified earlier when we sought intervention of the finance ministry and the cabinet secretary in this matter (last year). However the growth in ETF subscription is alarming,” said the source.
As on March 31, the number of folios under ETFs, including gold-backed ones, had grown 130 per cent to 442,000 units, while assets had expanded 170 per cent to Rs 6,916 crore.
However, an official with a fund house having an ETF based on gold said: “We deal in gold in the spot market and FMC regulates futures. Hence, we don’t come under FMC regulations.”
Earlier, FMC had taken up the issue with Sebi when the National Stock exchange wanted to launch futures and options on gold ETFs. During that time, some banks had also firmed their plans to launch gold ETFs. Sebi had, however, put off derivatives based on gold ETFs.