SEBI has banned sale of digital gold by brokers in stock exchanges. In a letter to the stock exchanges, the regulator informed the exchanges that trading (buying / selling) of digital gold through online platforms of its members (brokers) is in contravention of Securities Contracts (Regulation) Rules (SCRR), 1957 and that members of the exchange should discontinue such activities. Digital gold as a financial product had been gaining popularity especially among young tech savvy investors. However, SEBI had been concerned about digital gold trading in stock exchanges for some time because digital gold does not come under the definition of securities as per SEBI’s regulations. In accordance to SEBI’s directive, the stock exchanges have asked their trading members to discontinue the sale of digital gold on their platforms by September 10.
What is digital gold?
Digital gold is an online financial instrument, which enables you to buy and store gold virtually without renting a bank locker. Unlike other paper gold instruments like gold ETFs or gold funds, where you get the monetary value of gold, digital gold is backed by pure 24 carat gold, which is stored in a secure safety vault. Digital gold units were traded on stock exchanges. The buyer of digital gold was free to sell it in exchanges or convert the digital gold into pure 24 carat gold as per their convenience. Digital gold was marketed as an alternative way of buying and storing physical gold, without incurring the costs associated with the traditional way of buying gold i.e. impurities in gold jewellery, bank locker charges etc.
How investors purchased digital gold?
Investors purchased digital gold from some broking firms which sold digital gold online like Motilal Oswal, HDFC Securities, Paytm Money etc. There are also some digital gold service providers which sold digital gold online or through mobile apps. One of the main advantages of digital gold was that, you could buy gold with an investment amount as low as Rs 100. When you bought digital gold, the seller stored an equivalent value of physical gold on your behalf in a safety vault, which you could sell the digital gold in stock exchange or convert to physical gold ingots, coins etc as per your requirement. Sales of digital gold grew during the COVID-19 lockdown periods when buyers were unable to go to jewellery stores to purchase gold.
What will happen to the digital gold units of investors after SEBI ban?
Physical gold equivalent to the amount of digital gold purchased by investors are stored in the vaults of three metal trading companies — Augmont Gold, MMTC-PAMP India (a joint venture between state-run MMTC Ltd and Swiss firm MKS PAMP) and Digital Gold India with its SafeGold brand. The metal trading companies will retain the holdings of gold on behalf of existing investors. Investors will be given the option of redemption or sell-back.
Where can you buy digital gold now?
Since 10th September sale of digital gold has been prohibited on stock exchanges. However, you can still buy digital gold from platforms / mobile apps which do not come under SEBI regulations. These are mostly mobile wallets. Some experts have warned that there is no method to check whether the digital gold certificate issued by unregulated entities is backed with physical gold or not. You should be aware of the risks before investing.
Gold exchange-traded fund (or Gold ETF) is an exchange-traded fund (ETF) that aims to closely track the price of gold. Gold ETFs are units representing physical gold in dematerializedform. The units of the gold ETFs are traded on the stock exchange just like shares of a company. To buy and sell gold ETFs on the stock exchange you need to have demat and trading accounts. There are a number of gold ETFs listed on the stock exchanges. Gold ETF is a very cost efficient and convenient way of investing in Gold. The Net Asset Value (NAV) of Gold ETF closely corresponds to market value of physical 24 carat Gold subject to tracking errors. Gold ETFs are traded in large volumes and are highly liquid.
Gold fund of funds
You can invest in gold as a financial asset, even if you do not have demat and trading accounts by investing in gold fund of funds. Gold fund of funds, are mutual fund schemes which invest in Gold ETFs. Like other mutual funds, you can purchase Gold fund of funds units from Asset Management Companies (AMCs). Like mutual funds, you can also redeem units of Gold fund of funds with the Asset Management Company. Though the Total Expense Ratios (TERs) of Gold fund of funds are bit higher than those of Gold ETFs, they are also cost efficient investments compared to buying physical gold.
The festive season is just around the corner. This time of year is considered to be auspicious for gold purchase in many Indian households. Though SEBI has banned sale of digital gold by brokers, you can still invest in gold through ETFs and gold fund of funds. You should consult with your financial advisors, if you want to know more about Gold ETFs and Gold Fund of Funds.
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.