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NSE bars fintech platforms like Groww and Upstox from selling digital gold after SEBI flags legal breach: Report

The NSE circular restricting its members from selling digital gold could potentially impact sales this year as it is an industry that is worth about Rs 5,000 crore annually.

Stockbroking and fintech entities will have to stop selling digital gold from September 10 according to a report by the Economic Times. The instructions were conveyed in a circular issued by the National Stock Exchange of India (NSE). The NSE circular comes in the wake of the Securities and Exchange Board of India’s (SEBI) concern that digital gold sales by NSE members amounted to a breach of the Securities Contracts (Regulation) Rules (SCRR), 1957.

Digital gold is on the rise in India with sales registering 70 percent growth during the pandemic. The World Gold Council said that India traded 4 to 5 tonnes of digital gold in 2019 with 25 lakh investors. The rise in popularity can be attributed to changing perceptions about the safety of digital gold, its cost vis-á-vis physical gold, and the liquidity it offers in times of financial stress.

The investment asset, however, remains unregulated as it does not come under the purview of either SEBI or the Reserve Bank of India (RBI). The circular might impact digital gold sales which usually go up around August and September on account of certain Hindu festivals which are celebrated through gold purchases. 

India’s digital gold market

A report in The Week explains that digital gold is a way of purchasing or trading physical gold that can be held digitally through online platforms. Once a user buys gold, the seller stores the corresponding amount of gold in their lockers against a virtual certificate of purchase. 

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The three main companies which offer digital gold in India are:

  • Augmont Gold Ltd
  • MMTC-PAMP India
  • Digital Gold India.

Most digital gold sellers have tied up with either of these companies. Industry insiders informed ET that India’s digital gold market is worth about Rs 5,000 crore annually.

SEBI’s issues with NSE members selling digital gold

According to the ET report, the stock market regulator believes that brokers may be using client funds to buy digital gold which is a non-broking business. 

The report highlighted the missing regulatory oversight for companies but added that the companies have a self-regulatory audit and diligence mechanism in place to make up for it.

A securities lawyer told ET that digital gold falls in a regulatory grey zone presently, and brokers cannot sell digital gold unless SEBI releases a set of regulations. “There is no bar on these fintech firms to create a separate legal entity and set up a different page to sell digital gold,” the lawyer was quoted as saying. 

What did the NSE circular say? 

The circular issued on August 10 explained that Rule 8(3)(f) of SCRR restricts members “from engaging, either as principal or employee, in any business, other than that of securities or commodity derivatives”. 

“It has, however, come to the notice of SEBI/Exchange that certain Members are providing a platform to their clients for buying and selling of digital gold. SEBI vide its letter dated August 03, 2021, has informed Exchange that the said activity is in contravention of the aforementioned Rule 8 (3) (f) of SCRR, and the Members should refrain from undertaking any such activities,” the circular read. 

It gave members a month to comply with its guidelines. Many players such as Upstox, Groww, Paytm Money, HDFC Securities, Motilal Oswal, etc. will be affected by the circular as they will not be to sell digital gold on their platforms. However, NSE said that existing holders of digital gold need not worry about the circular as their holdings would remain safe.

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I cover several beats such as Crypto, Telecom, and OTT at MediaNama. I can be found loitering at my local theatre when I am off work consuming movies by the dozen.

MediaNama’s mission is to help build a digital ecosystem which is open, fair, global and competitive.

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