Executive Summary:
This circular from the Securities and Exchange Board of India (SEBI) establishes regulatory norms for Silver Exchange Traded Funds (ETFs) and amends existing regulations for Gold ETFs. The amendments to Mutual Funds Regulations, 1996 came into force on December 24, 2021 (30 days from the Gazette publication date of November 9, 2021). Existing Gold ETFs have three months from November 24, 2021, to comply with the new provisions.
Key Points / Main Content:
Silver ETF Norms:
* Investment Objective: Generate returns aligned with domestic physical silver prices, subject to tracking error.
* Investments:
* At least 95% of net assets in silver and silver-related instruments.
* Silver-related instruments include Exchange Traded Commodity Derivatives (ETCDs) with silver as the underlying asset.
* ETCD exposure limited to 10% of net asset value, unless physical delivery is intended; a written investment policy is required for ETCD investments.
* Cumulative gross exposure shall not exceed 100% of the net assets of the scheme.
* Physical silver must be standard 30 kg bars with 999 parts per thousand fineness, meeting LBMA standards.
* Valuation: Silver valuation must follow the methodology in paragraph 3B of the Eighth Schedule to MF Regulations.
* Net Asset Value (NAV): NAV calculated up to four decimal points using a specified formula.
* Total Expense Ratio (TER): Same as applicable for other ETFs under Regulation 52 of MF Regulations.
* NAV Disclosure: Daily disclosure on AMC website; indicative NAVs on stock exchange platforms during trading hours.
* Benchmark: LBMA Silver daily spot fixing price.
* Liquidity:
* Units listed on recognized stock exchanges.
* AMCs to appoint Authorized Participants (APs)/Market Makers (MMs) to provide secondary market liquidity.
* APs/MMs and large investors can directly buy/sell units with the Mutual Fund in creation unit size.
* Tracking Error/Difference:
* Tracking error (annualized standard deviation) should not exceed 2%; disclosed monthly on the AMC website.
* Approval of Board of AMC and Trustees is needed and prominent disclosure on the website of the AMC is required if tracking error exceeds 2% due to force majeure.
* Tracking difference (return difference between physical silver and ETF) disclosed monthly on the AMC website for various tenures.
* Disclosures in SID:
* Tracking error and tracking difference.
* Market, liquidity, and handling/storage risks.
* Applicable tax provisions.
* Dedicated Fund Manager: Required with relevant commodity market experience; not mandatory for each fund.
* Half Yearly Trustee Report: Physical verification of underlying silver by statutory auditor, reported to trustees and SEBI.
Additional Norms for Gold ETFs:
* Gold ETFs must additionally comply with the norms related to NAV Disclosure, Tracking Error/Difference, Disclosures in SID, and Dedicated Fund Manager, as specified for Silver ETFs.
Impact Analysis:
Recognized Stock Exchanges:
* Impact: Responsible for listing and providing a platform for trading Silver ETFs.
* Action Required: Ensure Silver ETFs are listed and traded according to the new norms.
Custodians:
* Impact: Handle and safeguard the physical silver underlying the ETFs.
* Action Required: Comply with the standards for silver storage and verification.
Mutual Funds (MFs)/Asset Management Companies (AMCs)/Trustee Companies/Board of Trustees of Mutual Funds:
* Impact: Directly responsible for managing and operating Silver and Gold ETFs.
* Action Required:
* Implement the new norms for Silver ETFs.
* Ensure existing Gold ETFs comply with the additional requirements within 3 months.
* Appoint dedicated fund managers.
* Make necessary disclosures in Scheme Information Documents (SIDs) and on websites.
* Put in place a written policy with regard to investment in ETCDs having silver as the underlying with due approval from the Board of the AMC and the Trustees.
* Ensure physical verification of underlying silver by statutory auditor and report to trustees and SEBI.
Association of Mutual Funds in India (AMFI):
* Impact: Industry body that may need to provide guidance and support to its members.
* Action Required: Disseminate information about the new regulations to member AMCs and facilitate compliance.
Investors:
* Impact: Directly affected by the transparency, liquidity, and risk management of Silver and Gold ETFs.
* Action Required: Review the Scheme Information Document (SID) and understand the risks associated with investing in Silver ETFs.
Key Entities Referenced
Securities and Exchange Board of India: Regulatory body for securities and commodity market in India.
Silver Exchange Traded Funds (Silver ETFs): Investment funds that track the price of silver.
Gold Exchange Traded Funds (Gold ETFs): Investment funds that track the price of gold.
SEBI Mutual Funds Regulations, 1996: Regulations governing the operation and management of mutual funds in India, as established by SEBI.
Association of Mutual Funds in India (AMFI): An association of all the Asset Management Companies (AMC's) of SEBI registered Mutual Funds in India.
Exchange Traded Commodity Derivatives (ETCDs): Derivatives contracts traded on an exchange, with commodities as the underlying asset.
London Bullion Market Association (LBMA): The global authority on precious metals, setting standards for refining, trading, and storage.
Securities and Exchange Board of India Act, 1992: Act of the Parliament of India to protect the interests of investors in securities and to promote the development of, and to regulate the securities market
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Securities and Exchange Board of India
CIRCULAR
SEBI/HO/IMD/DF2/CIR/P/2021/668 November 24, 2021
All Recognized Stock Exchanges/
All Custodians/
All Mutual Funds (MFs)/
All Asset Management Companies (AMCs)/
All Trustee Companies/ Board of Trustees of Mutual Funds/
Association of Mutual Funds in India (AMFI)
Sir / Madam,
Subject: Norms for Silver Exchange Traded Funds (Silver ETFs) and Gold Exchange
Traded Funds (Gold ETFs).
A. In order to have regulatory mechanism for Silver Exchange Traded Funds (Silver ETFs),
amendments to SEBI (Mutual Funds) Regulations, 1996 (hereinafter called as “MF
Regulations”) have been notified vide Gazette notification no. SEBI/LAD-
NRO/GN/2021/56 dated November 9, 2021. These amendments to MF Regulations shall
come into force on 30th day from the date of their publication in the Official Gazette.
B. With respect to Silver ETFs, the following operating norms have been specified:
1. Investment Objective: To generate returns that are in line with the performance of
physical silver in domestic prices, subject to tracking error.
2. Investments:
2.1. A Silver ETF Scheme shall invest at least 95% of the net assets of the scheme in:
2.1.1. Silver and
2.1.2. Silver related instruments. Exchange Traded Commodity Derivatives (ETCDs)
having silver as the underlying shall be considered as ‘silver related instrument’
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Securities and Exchange Board of India
for Silver ETFs. Investment in ETCDs having silver as the underlying by Silver
ETFs will be subject to following conditions:
i. The exposure to ETCDs having silver as the underlying shall not exceed 10%
of net asset value of the scheme. However, the above limit of 10% shall not
be applicable to Silver ETFs where the intention is to take delivery of the
physical silver and not to roll over its position to next contract cycle.
ii. Before investing in ETCDs having silver as the underlying, mutual funds shall
put in place a written policy with regard to such investment with due approval
from the Board of the AMC and the Trustees. The policy shall be reviewed by
the Board of AMC and Trustees at least once a year.
iii. The cumulative gross exposure of Silver ETFs shall not exceed 100% of the
net assets of the scheme.
2.2. The physical silver shall be of standard 30 kg bars with fineness of 999 parts per
thousand (or 99.9% purity) confirming to London Bullion Market Association
(LBMA) Good Delivery Standards.
3. Valuation: Silver shall be valued based on the methodology provided in paragraph
3B of Eighth Schedule to MF Regulations.
4. Determination of Net Asset Value (NAV):
4.1. The NAV of units of Silver ETF Scheme shall be calculated up to four decimal
points as shown below:
Market or Fair Value of Scheme's investments +
Current Assets - Current Liabilities and Provision
NAV (in INR terms) =
Number of units outstanding under the Scheme
on the Valuation Date
5. Total Expense Ratio (TER): The TER applicable for Silver ETF schemes shall be
same as the TER applicable for ETFs in terms of Regulation 52 of MF Regulations.
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Securities and Exchange Board of India
6. Disclosure of NAV: The NAV of Silver ETFs shall be disclosed on daily basis on
the website of the AMC. Further, the indicative NAVs of Silver ETFs shall be
disclosed on Stock Exchange platforms, where the units of these ETFs are listed, on
continuous basis during the trading hours.
7. Benchmark for Silver ETF Scheme: Silver ETF Scheme(s) shall be benchmarked
against the price of silver (based on LBMA Silver daily spot fixing price).
8. Liquidity:
8.1. Units of Silver ETFs shall be listed on the recognized Stock Exchange(s).
8.2. The AMC shall appoint Authorized Participants (APs)/ Market Makers (MMs) to
provide liquidity for the units of Silver ETFs in secondary market on an ongoing
basis.
8.3. APs/ MMs and large investors may directly buy/sell units with the Mutual Fund in
creation unit size. The AMC shall disclose the details about the creation unit size
of Silver ETF in Scheme Information Document (SID).
9. Tracking Error & Tracking Difference:
9.1. The tracking error i.e. the annualised standard deviation of the difference in daily
returns between physical silver and the NAV of Silver ETF based on past one year
rolling over data (For ETFs in existence for a period of less than one year,
annualized standard deviation shall be calculated based on available data) shall not
exceed 2%. The disclosure regarding the same shall be made on monthly basis on
the website of the AMC.
9.2. In case of unavoidable circumstances in the nature of force majeure which are
beyond the control of the AMCs, the tracking error may exceed 2%, for which
approval of Board of AMC and Trustees shall be taken and the same shall
prominently be disclosed on the website of the AMC.
9.3. Along with the disclosure of tracking error, Silver ETF schemes shall also disclose
the tracking difference i.e. the difference of returns between physical silver and the
Silver ETF, on the website of the AMC on monthly basis for tenures 1 year, 3 year,
5 year, 10 year and since the date of allotment of units.
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Securities and Exchange Board of India
10. Disclosures: To enable the investors to take an informed decision, the SID of Silver
ETFs shall, inter-alia, disclose the following:
10.1. Tracking error and tracking difference,
10.2. Market risk due to volatility in silver prices,
10.3. Liquidity risks in physical or derivative markets impairing the ability of the fund
to buy and sell silver,
10.4. Risks associated with handling, storing and safekeeping of physical silver;
10.5. Applicable tax provisions.
11. Dedicated Fund Manager: For commodity based funds such as Gold ETFs, Silver
ETFs and other funds participating in commodities market, a dedicated fund manager
with relevant skill and experience in commodities market including commodity
derivatives market shall be appointed to manage the fund. However, it is clarified
that dedicated fund manager(s) for each Commodity based fund is not mandatory.
12. Half Yearly Trustee Report:
12.1. Physical verification of silver underlying the Silver ETF units shall be carried out
by the statutory auditor of mutual fund and shall report the same to trustees on half
yearly basis.
12.2. The confirmation on physical verification of silver as stated above shall also form
part of half yearly report by trustees to SEBI.
C. Additional Norms for Gold ETFs: Gold ETFs shall additionally comply with the norms
as stated at sub-para 6, 9, 10 and 11 of paragraph B above as specified for Silver ETFs.
D. Applicability:
1. The provisions of paragraphs B & C shall come into force from the effective date of
the amendments to MF Regulations as mentioned in paragraph A above.
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Securities and Exchange Board of India
2. The existing Gold ETFs shall comply with the provisions of paragraph C within a
period of 3 months from the date of the circular.
E. This circular is issued in exercise of powers conferred under Section 11 (1) of the
Securities and Exchange Board of India Act, 1992, read with the provisions of
Regulation 77 of SEBI (Mutual Funds) Regulations, 1996, to protect the interests of
investors in securities and to promote the development of, and to regulate the securities
market.
Yours faithfully,
Hruda Ranjan Sahoo
Deputy General Manager
Tel no.: 022-26449586
Email: hrsahoo@sebi.gov.in
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