Your gold or silver ETF holds physical bullion: Here’s what SEBI’s new vault rules mean for investors

Gold and silver ETF investors hold units in their demat accounts, while the physical bullion backing these units is stored in vaults.

The Securities and Exchange Board of India (SEBI) has approved changes to its vault manager regulations to bring the storage of bullion underlying gold and silver ETFs under a broader common regulatory framework.

The changes were approved at SEBI’s 215th board meeting on Thursday. The regulator said the move is aimed at creating a common framework for vaulting services across different bullion-related instruments and strengthening safeguards around the storage and handling of physical bullion.

Why does vaulting matter to ETF investors?

When you buy a gold or silver ETF, you do not receive physical gold or silver. Instead, you hold ETF units in your demat account, while the mutual fund scheme holds the underlying bullion.

That means the safety, storage, insurance, quality, and reconciliation of the physical bullion are important parts of the structure supporting the ETF.

Until now, SEBI’s specific Vault Managers Regulations, introduced in 2021, were primarily designed for gold underlying Electronic Gold Receipts (EGRs). The framework covered areas such as registration of vault managers, safekeeping, insurance, purity checks, record-keeping and reconciliation.

Gold and silver ETFs were subject to the mutual fund framework for their underlying holdings.

“As the Indian bullion market continues to evolve with the growth of bullion-related instruments such as Gold and Silver Exchange Traded Funds (ETFs) and derivatives on bullion, a need was felt to review the existing framework,” according to SEBI.

What is changing for gold and silver ETFs?

SEBI has approved expanding the scope of the Vault Managers Regulations beyond EGRs. The revised framework will cover vaulting services for bullion underlying SEBI-specified bullion-related instruments, including gold and silver ETFs and bullion derivatives.

This means the same broad regulatory framework will apply to the physical bullion held across these different products.

For investors, the key point is that the rules governing the physical asset behind these products are being brought under a more uniform framework.

What additional safeguards will vault managers have to follow?

SEBI has made various amendments to strengthen requirements around how bullion is stored, protected, and accounted for.

• Segregation: Bullion will have to be appropriately segregated based on the instrument and entity for which it is held.
• Security: Vault managers will have to address risks such as theft, burglary, fire, fraud, terrorism, and cyberattacks.
• Quality standards: The existing EGR-specific “Gold Standards” will be replaced with broader “Bullion Delivery Standards”.
• Governance: Vault managers will have to appoint a compliance officer with specified responsibilities.
• Net-worth requirements: SEBI has approved increasing the minimum net-worth requirement for vault managers from ₹50 crore to ₹75 crore.

SEBI will issue a consequential circular to operationalise the amended regulatory framework.

What does the move mean for investors?

The amendments are focused on the custody and management of the physical bullion underlying these instruments, rather than changing the basic way investors buy, sell, or hold gold or silver ETFs.

“The strengthened framework is expected to enhance investor protection and confidence in SEBI-specified bullion-related instruments through improved safeguards,” as mentioned in the release.

For investors holding gold or silver ETFs, the significance is therefore less about a change in the product itself and more about stronger regulatory oversight of the physical asset backing it.

Disclaimer: This is purely for educational/informational purposes and should not be taken as any sort of investment advice. Always consult a SEBI-registered advisor before making any investment decisions.