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How will NSE move to stop sale of digital gold affect investors?

India’s digital gold market is estimated to be around Rs 5,000 crore

GLOBAL-MARKETS/ REUTERS

The purchase of digital gold has been on the rise in India in the last few years, given the convenience, safety and assured purity it offers over conventional methods like buying gold from local jeweller and then keeping it at home. India’s digital gold market is estimated to be around Rs 5,000 crore. But, now the National Stock Exchange (NSE) has instructed its members and stock brokers to stop selling digital gold on their platforms.

Why has NSE taken this decision?

The exchange cited Rule 8 (3)(f) of Securities Contracts (Regulations) Rules which restricts 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.

SEBI, in a letter dated August 3, wrote to the exchange that certain members were providing a platform to their clients for buying and selling digital gold, which was in contravention to the above rule and members would have to refrain from undertaking such activities.

“Members, currently engaging in the activity, shall cease to undertake all activities in this regard, within one month from the date of this circular during which necessary communications, regarding the discontinuation, shall be made to the respective clients,” the NSE said.

What happens now?

Broking firms like Motilal Oswal Financial Services, Groww and Upstox among others were offering digital gold products to their clients. They must now wind this down by September 10.

According to Vijay Singhania, chairman, TradeSmart, a discount broking firm, digital gold does not come under the definition of securities as defined in the Securities Contracts (Regulations) Act, so SEBI-registered entities are prohibited from offering these products. TradeSmart was not selling digital gold.

Should investors be worried?

To answer this, one needs to understand how digital gold buying works. One can buy digital from various platforms today – fintechs like PhonePe and Paytm sell digital gold as do some stock brokers and even banks. But, these entities don’t essentially store gold, but only offer a platform to buy gold from refiners like MMTC-PAMP and Augmont Gold. When someone buys digital gold, 24 carat gold equivalent to the amount invested is stored under his/her name in high security vaults by the refiners.

Kishore Narne, head of commodity and currency at Motilal Oswal Financial Services, which was selling digital gold in partnership with MMTC-PAMP, said the broking firm was only a distributor of the product. It will now be discontinue the distribution.

Existing investors who have already bought gold, should note that MMTC-PAMP will continue to own the product. The underlying gold will also be continued to be held by MMTC-PAMP.

MMTC-PAMP is a joint venture between India’s state owned MMTC and Switzerland’s PAMP SA, the world’s leading bullion brand. It has the largest BIS-certified refinery for gold and silver in India. So, to that extent the purity of the gold won't be an issue.

However, Singhania of TradeSmart cautioned that "there is no method to check whether the digital gold certificate is backed with the physical gold."

Alternate platforms for digital gold?

The recent circular prohibits only SEBI-registered entities from selling digital gold. So, while stock brokers and securities firms may not be able to sell it, “it may be continued to be sold by other unregulated entities, subject to RBI directions, if any,” said Singhania of TradeSmart.

Digital gold could also be bought through a few banks. Fintech platforms like PhonePe and Google Pay also offer digital gold products. For players others than brokers, it could be business as usual, said people in the know.

Just like the case with Motilal Oswal, these fintech platforms and banks are also typically only distributors of the product.

“Gold purchased on PhonePe is stored in a free bank-grade insured locker facility maintained by the providers, SafeGold and MMTC-PAMP India” PhonePe said in a blog.

Google Pay also allows one to digitally buy and store gold from MMTC-PAMP.  

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