The Securities & Exchange Board of India (Sebi) recently conducted a series of checks to ascertain whether the mutual fund industry had the requisite quantum of physical gold to back the units of their gold exchange-traded funds (ETFs) floated on the exchanges. The investigation assumes significance in the aftermath of the NSEL crisis where it has emerged that entities were trading on the spot exchange without adequate physical commodities to back the trades.
“Given the backdrop of the NSEL crisis, Sebi had sent a team to verify if the fund houses had the required quantity of physical gold assets with them. The team concluded that the amount of physical gold with the fund houses was in fact slightly more than the value of ETF units they had,” said a senior fund official, on condition of anonymity. “The regulator has expressed satisfaction that things are in order,” he added.
Every fund house has to sell or buy physical gold and store it with a custodian bank based on the units of gold ETFs it issues. “Technically, it is not possible for fund houses to trade in ETF units without the requisite backing of physical gold. But, I guess, the regulator felt it was better to be safe than sorry and went ahead with the verification,” said another senior fund official, who also didn’t want to be named.
“We have very substantial volume of trades of gold exchange-traded funds. So, is the stock of gold physically available or not? We sent our team that physically verified that against all the gold ETFs that have been issued in the country, there are gold stocks,” said Sebi chairman UK Sinha at a recent “Idea Exchange” with the FE and IE teams.
Of late, fund houses have been finding it difficult to source physical gold from banks following RBI’s new guidelines aimed at restricting gold imports. Mutual funds typically buy the yellow metal from banks because of the convenience, quality and cost advantage they offer. Although MFs can buy gold from non-bank entities as well, these entities are not equipped to handle the kind of volumes required by fund houses on a daily basis, said experts.
As of August 31 this year, there were about 11 gold funds in the market, with an AUM totalling R4,577 crore. Gold ETF assets from 14 schemes amounted to R11,837 crore. Between April and July, gold ETFs have seen net outflows of R932 crore.