SEBI Warns Investment Advisors against Dealing in Digital Gold, Other Unregulated Activities

Moneylife Digital Team 21 October 2021

Investor Interest

Market regulator, Securities and Exchange Board of India (SEBI), has warned registered investment advisers (IAs) not to engage in the unregulated activity by providing a platform for buying, selling or dealing in unregulated products, including digital gold.

In a statement, the market regulator says, “Undertaking such unregulated activity including dealing (i.e., advisory, distribution and execution or implementation services) in digital gold by investment advisers is not in accordance with the provisions of Section 12(1) of the SEBI Act, 1992 read with the SEBI (Investment Advisers) Regulations (SCRR), 2013.”

It counsels investment advisers to refrain from undertaking such unregulated activities. “Any dealing in unregulated activities by Investment Advisers may entail action as deemed appropriate under the SEBI Act, 1992 and regulations framed thereunder,” SEBI added.

Last month, SEBI banned buying digital gold from stockbrokers.

In August this year, the National Stock Exchange (NSE) had asked its members, including stockbrokers, to discontinue the sale of digital gold on their platforms by 10th September.

In its letter dated 3 August 2021, SEBI had informed NSE that the said activity is in contravention of SCRR, and the members should refrain from undertaking any such activities.

The SCRR rules restrict all members from engaging, either as principal or employee, in any business other than that of securities or commodity derivatives, except as a broker or agent, not involving any personal financial liability.

A circular issued by NSE on 10th August said, “...It has, however, come to the notice of SEBI/Exchange that certain members are providing a platform to their clients for buying and selling of digital gold. SEBI vide a letter dated 3rd August has informed the Exchange that the said activity is in contravention of Rule 8 (3) (f) of SCRR, and members should refrain from undertaking any such activities.”

Accordingly, NSE directed members not to carry out such activity and comply with the regulatory requirements at all times. It is reported that all leading exchanges have issued similar notices in India in recent weeks.

All the listed products have a settlement guarantee by the Exchange and carry a different risk profile. If an investor loses money due to digital gold, neither the regulator nor the exchanges can be held responsible. Hence, SEBI’s action is only restricted to the extent that one cannot use SEBI-licensed platforms to sell such products.

Market experts say digital gold units are not issued by any regulated entity. There is no method to check whether the digital gold certificate is backed with physical gold or not. A few jewellery companies like Titan and some banks were known for selling digital gold.

Digital gold does not come under the definition of securities as defined in the Securities Contract (Regulations) Act 1956 and market experts say brokers cannot offer such unregulated products through their SEBI-registered entity or platform.

The SEBI circular only prohibits the dealing or offering of digital gold via SEBI registered entities, as it is not a security as defined under SCRR. It may continue to be sold by the unregulated entities, subject to RBI (Reserve Bank of India) directions if any.

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