The Securities and Exchange Board of India (SEBI) has proposed using spot price published by the domestic commodity exchanges for valuation of gold and silver to bring in uniformity in the valuation process of the precious metals throughout the mutual fund industry for investments made by gold and silver ETFs.
In a consultation paper issued on Wednesday, the capital markets watchdog proposed moving away from the current practice of using London Bullion Market Association (LBMA) prices as the base for ascertaining the value of the holdings in gold and silver ETFs of asset management companies.
"... a need is felt to standardize the valuation methodology for gold and silver across the mutual fund industry, in order to ensure consistency and eliminate discrepancies in the valuation of these commodities," stated the SEBI consultation paper.
"Presently, different AMCs use different sources of domestic benchmark to apply necessary premium/ discount, which leads to non-uniformity of the valuation practice for gold and silver across the MF industry," added the paper.
Incidentally, under the current practice, the LBMA price is taken as the base rate before adjusting it for conversion to metric measure as per standard conversion rates and conversion of US dollars into Indian rupees as per the RBI reference rate. Thereafter, customs duty and other applicable taxes and levies are factored in for arriving at the final valuation.
As per the SEBI paper, AMCs face certain issues under the current practices including duplication of effort for valuing physical gold/ silver held by MF schemes.
The proposed mechanism, however, will take into consideration the spot price published by the domestic commodity exchanges for valuation of gold and silver.
"There are various service providers/ index providers in India such as jeweller associations, commodities exchanges etc., which publish spot price of commodities including gold and silver under the domestic market condition. The commodity exchanges usually poll the spot prices of gold and silver on a daily basis and this price is used as reference price for physical market transaction in gold/ silver within India," stated the SEBI paper.
"In view of the various steps currently involved in the determination of the final valuation of gold / silver in the gold and silver ETFs, there may be merit in using the polled spot prices published by the domestic exchanges, instead of the LBMA price, as the reference. This change may aid in doing away with subjective adjustment of the premium/ discount, as these spot prices are polled from the domestic participants and are reflective of the domestic demand and supply," it added.
"It is therefore 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 / silver. This will aid in reduction in duplication of efforts and also represent the market prices of gold and silver as per the domestic demand and supply scenarios," stated the SEBI paper.
Further, as part of its attempts to enhance the transparency levels, the capital markets regulator has also proposed making public the methodology of polling and the policies for the fair conduct of polling to ascertain the spot prices.
SEBI has set a deadline of August 6 for submitting feedback to the proposed changes.
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