Sebi mulls uniformity in valuation of gold, silver held by mutual funds

New Delhi: Markets regulator Sebi is considering a review of the valuation methodology for physical gold and silver held by mutual funds through exchange-traded funds (ETFs) to ensure greater consistency and better alignment with prevailing domestic market prices.

In this regard, Sebi has proposed that AMCs should use spot prices published by domestic commodity exchanges to value gold and silver, replacing the current practice of using LBMA prices, according to its consultation paper on Wednesday.

It is also looking to identify a uniform domestic benchmark and make the detailed polling mechanism for spot price determination publicly available.

Currently, gold held by any gold ETF scheme is required to be valued at the AM fixing price of the London Bullion Market Association (LBMA) in US dollars per troy ounce for gold having a fineness of 995.0 parts per thousand.

Similarly, silver held by a silver ETF scheme is valued at the AM fixing price of the LBMA in US dollars per troy ounce for silver having a fineness of 999.0 parts per thousand.

While the physical gold and silver held by gold and silver ETFs are valued based on the LBMA price after necessary conversions, the Exchange Traded Commodity Derivatives (ETCDs) on gold and silver held by mutual fund schemes are valued using the closing price of futures on the respective domestic commodity exchanges.

This variation in valuation methods for the same underlying asset has highlighted the need for standardization.

Accordingly, Sebi, in its consultation paper, "proposed that instead of using LBMA price as a starting point for valuation, it may be mandated that AMCs directly use the spot prices published by the domestic commodity exchanges to value the gold and silver," Sebi said.

This will aid in the reduction of duplication of efforts and also represent the market prices of gold and silver as per the domestic demand and supply scenarios, it added.

The move is expected to simplify the valuation process, which currently involves using LBMA prices in USD, converting them into INR, adding customs duties, and making adjustments for domestic demand or supply through notional premiums or discounts.

Additionally, Sebi is looking to identify a domestic benchmark that should be adopted uniformly across the mutual fund industry for gold and silver valuation.

At present, there are multiple sources of domestic spot prices such as commodity exchanges, jeweller associations, and index providers, leading to further inconsistency.

Additionally, Sebi has also proposed that the detailed polling mechanism used by domestic regulated entities for determining spot prices -- including the methodology and policies ensuring fair conduct -- be made public.

Currently, spot prices are derived through polling from participants in the physical market such as traders and importers, with exchanges applying statistical methods to calculate the final price.

"The proposed change is expected to bring uniformity in the valuation process of gold and silver throughout the mutual fund industry for investments made by the gold and silver ETFs and more closely align their valuation with domestic prices of gold and silver," Sebi said.

The Securities and Exchange Board of India (Sebi) has sought public comments till August 6 on the proposals.