Sebi, FMC lock horns over gold funds

The Securities and Exchange Board of India (Sebi) is locked in a turf war with the Forwards Market Commission (FMC) over the regulation of exchange-traded gold-backed mutual funds, announced in the Budget for 2005-06.

Both regulators feel that they should be exclusively regulating the product. According to sources familiar with the situation, Sebi's contention is that any kind instrument traded on the exchanges automatically falls in its jurisdiction irrespective of whether it is defined as a security under the Securities Contract Regulation Act.

To press home its point, Sebi argues that since the product is in the mutual fund sector, by definition it should be under it's purview.

The FMC, on the other hand, holds the view that since the underlying asset for such instrument is a commodity (gold), the regulation of the product lies with the commission. Incidentally, gold is not a security under the Securities Contract Regulation Act.

This battle over who should be regulating the new product has come in the way of devising a framework for introducing exchange-traded gold funds. Though the product was announced in the Budget, the Reserve Bank of India has yet to give its approval.

The mutual fund sector is keenly watching the development. An industry insider pointed out that a whole lot of issues had to be discussed before they could structure the product and put it in the market.

The most important issue to be sorted out is to identify the depository which can hold the gold in the physical form.

Overseas, asset management companies issue units against gold. These units can be traded on the exchanges, the market price being determined by the market price of gold which will drive the demand and supply for the units.