Sebi may let banks act as gold ETF custodians

The Securities and Exchange Board of India (Sebi) plans to allow only those banks holding licence to trade in gold to offer custodial services in gold for the proposed Gold Exchange Traded Funds (GETFs).

The list of banks eligible for such services will include ICICI Bank, Bank of Nova Scotia, State Bank of India, HDFC Bank and a few others.

Sebi is expected to change the custodians' rules through an amendment to the Sebi Act to enable licensed banks to act as custodians in GETFs. The custodians would keep the bullion gold, the underlying asset in GETF, under safe custody.

GETFs will help small investors invest in gold-backed asset in a simple and cost-effective manner. The physically allocated bullion gold is stored and insured by banks that have the Reserve Bank of India (RBI) nod to deal in gold, sources said.

UTI Mutual Fund and Benchmark ETF, which have filed draft documents for launching GETFs in India, are awaiting the Sebi approval to launch their schemes.

Chairman of Association of Mutual Funds in India (Amfi) A P Kurien said banks which already deal in gold would be ideal candidates to act as custodians for GETFs in India.

"We expect Sebi to come out with an amendment in the custodial rules shortly," he said. Fund houses would be required to appoint only the Sebi-approved entities to act as custodians for their respective GETF schemes, Kurien said.

Dharmesh Sodah, joint director of World Gold Council (WGC), said internationally too, banks, such as HSBC, are big players in the business of custodial services in gold.

For instance, Asia's first GETF, 'streetTRACKS Gold Shares,' which was cross-listed on the Singapore Exchange (SGX) on Monday, was backed by physically allocated gold bullion stored and insured by its custodian HSBC Bank USA.

World Gold Trust Services LLC, a wholly-owned subsidiary of WGC, is the sponsor for the GETF. Sodah said the Sebi's rules might also contain provision for allowing sub-custodians in line with global practice.

Sebi announced the decision to allow mutual funds to launch GETFs in December-end 2005, but several nitty-gritty, including who would act as custodians for the schemes, resulted in the delay of the launch of GETFs in the country.