by Sandeep Parekh
Through a recent circular issued by the SEBI, registered investment advisors were prevented from engaging in unregulated activities such as providing a platform for buying and selling unregulated products, including digital gold. According to SEBI, such unregulated activities violate Section 12 (1) of the SEBI Act, 1992 read with SEBI (Investment Advisers) Regulations, 2013.
A similar ban on engaging in activities related to unregulated products such as acting as trustee for digital gold has also been imposed on SEBI-registered bond trustees. The circulars also warn that any unregulated activity by such parties may lead to an action pursuant to the SEBI law and the regulations contained therein.
The restrictions follow closely in the wake of a notice issued by exchanges in August this year to their members, including stockbrokers, banning them from distributing digital gold on their platforms since September 10, on the grounds that the themselves have violated Rule 8 (3) (f) of the Securities Contracts Rules (Regulation), 1957. The rule restricts brokers from engaging in any ‘non-securities’ business “except as an intermediary or agent that does not involve no personal financial responsibility “.
Recent circulars, however, prevent investment advisors and bond trustees from trading all unregulated products, which would concern not only digital gold but also other unregulated products such as cryptocurrencies, etc. Warranty: Non-regulated products are not insured by exchanges or any regulatory body.
Therefore, the above prohibition is considered to result from a lack of regulatory oversight and was justified in order to safeguard investors from losing their investment in the event that the service provider goes into liquidation or closes their account. The move could also be seen as an attempt to increase investor interest in regulated products such as gold exchange-traded funds, which are an alternative to digital gold.
However, with regards to digital gold, it should be noted that digital gold certificates are backed by actual physical reserves and most service providers offer investors transferability and / or redemption of their metal holdings. Additionally, most platforms offer digital gold through reputable suppliers such as Augmont Gold Limited, MMTC-PAMP India and Digital Gold India Pvt. Ltd. Additionally, the physical metal is stored in insured warehouses and monitored by independent security trustees. Therefore, although unregulated, digital gold systems offer a safe and flexible investment option to retail investors who wish to accumulate gold reserves in small quantities.
Furthermore, it is not clear from the circulars how the offering of digital gold by investment advisors violates the SEBI (Investment Advisers) Regulations, 2013. The scope of the framework is limited to entities providing “advice for investments “, or advice relating to” securities “. or “investment products”. Although digital gold does not fall within the definition of “securities”, the term “investment products” is not defined by the SEBI law or the regulations contained therein. Therefore, products such as digital gold currently fall outside the regulatory scope of SEBI.
The above ban is also interesting to note in light of the government’s growing efforts to financialize gold. Furthermore, when the ministry of finance proposed to establish regulated gold exchanges and SEBI also published a consultation document on the subject to make the gold exchange operational which would allow to facilitate gold trading through electronic receipts of the gold. At a time when gold is increasingly viewed by retail investors as a favorable investment option during market volatilities, the new restrictions create uncertainty about the future of gold as a financial asset.
It should also be noted that while products such as digital gold are unregulated and there are regulatory gaps regarding assurance of dosage quality and storage security, it could be linked to appropriate standards which could be made uniformly enforceable. throughout the market participants, until gold exchanges are established. A total ban, on the other hand, can completely erode investor confidence in the product.
While unregulated entities can still continue to offer digital gold through their platforms, it remains to be seen whether it would enjoy the same investor confidence, particularly with the aforementioned circulars fueling skepticism about the legitimacy of the product. The previous warning issued by exchanges in August of this year had led fintech companies to completely shut down the digital gold trade before the holiday season, causing the market to decline.
Additionally, the above restrictions can completely discourage digital gold trading until a comprehensive framework for regulating gold is established. While SEBI is justifiably concerned about the damage, it should allow, subject to a framework, not just gold but other legitimate financial products. Asset diversification is one of the few free meals in finance and reduces investor risk without reducing returns.
Co-author with Sudarshana Basu, associate, Finsec Law Advisors
Managing Partner, Finsec Law Advisors
Opinions are personal