The rule restricts brokers from engaging in any ‘non-securities services’ business “except as a broker or agent not involving any personal financial liability”.By Sandeep Parekh
Through a recent circular issued by SEBI, registered investment advisers have been barred from undertaking unregulated activities such as providing a platform for buying and selling unregulated products, including digital gold. According to SEBI, such unregulated activities contravene Section 12(1) of the SEBI Act, 1992 read with the SEBI (Investment Advisers) Regulations, 2013.
A similar prohibition, on undertaking activities related to unregulated products such as acting as trustee for digital gold, has also been imposed on SEBI-registered debenture trustees. The circulars further warn that any dealing in unregulated activities by such entities may entail action under the SEBI Act and the regulations framed thereunder.
The restrictions follow closely on the heels of an advisory issued by the stock exchanges in August this year to their members, including stockbrokers, prohibiting them from distributing digital gold on their platforms from September 10, on the basis that the same violated that Rule 8(3)(f) of the Securities Contracts (Regulation) Rules, 1957. The rule restricts brokers from engaging in any ‘non-securities services’ business “except as a broker or agent not involving any personal financial liability”.
The recent circulars, however, restrict investment advisers and debenture trustees from dealing in all unregulated products, which would cover not only digital gold but also other unregulated products such as cryptocurrency, etc. Unlike securities—which, when listed, are backed by a settlement guarantee—unregulated products do not carry assurance from the exchanges or any regulator.
Thus, it is believed that the above prohibition stemmed from a lack of regulatory oversight and was warranted in order to safeguard investors from losing their investment in the event the service-provider enters into liquidation or terminates the account. The move could also be viewed as an attempt to boost investor interest in regulated products such as gold exchange traded funds, which are an alternative to digital gold.
However, as far as digital gold is concerned, 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 holdings in metal. Moreover, most platforms offer digital gold through trusted vendors such as Augmont Gold Limited, MMTC-PAMP India and Digital Gold India Pvt. Ltd. Further, the physical metal is stored in insured warehouses and monitored by independent security trustees. Therefore, though unregulated, digital gold schemes offer a secure and flexible investment option to retail investors who wish to accumulate gold holdings in small quantities.
It is also unclear from the circulars as to how offering of digital gold by investment advisers violates the SEBI (Investment Advisers) Regulations, 2013. The scope of the framework is limited to entities rendering ‘investment advice’, i.e. advice relating to ‘securities’ or ‘investment products’. While digital gold does not fall within the definition of ‘securities’, the term ‘investment products’ is not defined under the SEBI Act or the regulations framed thereunder. Therefore, products such as digital gold presently fall outside the regulatory purview of SEBI.
The above prohibition is also interesting to note in light of the increasing attempts being made by the government towards financialisation of gold. More so, when the finance ministry has proposed establishing regulated gold exchanges and SEBI has also issued a consultation paper in this regard for operationalising the gold exchange which would enable facilitation of trading in gold through electronic gold receipts. At a time when gold is increasingly being viewed by retail investors as a favourable investment option during market volatilities, the new restrictions create an uncertainty towards 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 as far as ensuring the quality of assaying and security of storage is concerned, the same could be plugged through appropriate standards which could be uniformly made applicable across market participants, until such time as the gold exchanges are established. A complete ban, on the other hand, may erode investor confidence in the product altogether.
While unregulated entities may still continue to offer digital gold through their platforms, it remains to be seen whether it would enjoy as much investor confidence, especially with the above circulars fuelling scepticism regarding legitimacy of the product. The earlier advisory issued by the stock exchanges in August this year had led fintech firms to completely wind down trading in digital gold ahead of the festive season, resulting in a decline of the market.
Additionally, the above restrictions may completely discourage trading in digital gold until such time that a comprehensive framework to regulate gold is laid down. While SEBI is rightly concerned about mischief, it should enable, subject to a framework, not just gold but other legitimate financial products. Diversification of assets is one of the few free lunches in finance, and reduces investor-risk without reducing returns.
Co-authored with Sudarshana Basu, associate, Finsec Law Advisors
Managing partner, Finsec Law Advisors
Views are personal
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