Sebi's local pricing plan for gold, silver ETFs faces calls for benchmark clarity

Mint

22-07-2025

Mumbai: India's markets regulator is preparing a sweeping change in how gold and silver exchange-traded funds (ETFs) are valued, a move that could significantly alter pricing norms for a fast-growing segment of the country's mutual fund industry.
The Securities and Exchange Board of India has proposed replacing the long-used London Bullion Market Association benchmark with domestic spot prices, aiming to simplify fund valuation and better align it with local market dynamics. The proposal, laid out in a consultation paper dated 16 July, has drawn a mix of cautious support and sharp scepticism from asset managers and industry bodies.
Assets under management in Indian gold ETFs stood at ₹64,777 crore ($7.5 billion) as of June, up 89% from a year earlier, according to data from the Association of Mutual Funds in India (Amfi). Net inflows jumped 613% in June from May, reaching ₹2,081 crore—the highest in five months.
A push for uniformity
At the heart of the overhaul is an attempt to standardize how net asset values (NAVs) are calculated across fund houses.
Today, ETF NAVs are based on LBMA reference prices, converted to rupees and adjusted for import duties and domestic premiums.
'However, this method varies across AMCs—some adjust daily, others weekly or monthly—creating inconsistencies," noted Radhika Gupta, managing director and chief executive, Edelweiss Asset Management Co.
The LBMA standard price is set via a twice-daily electronic auction in London, reflecting near 24-hour global gold markets.
By contrast, domestic benchmarks, such as those generated by the India Bullion and Jewellers Association (IBJA) or the Multi Commodity Exchange of India (MCX), are based on quotes submitted by local bullion dealers at specific times. High and low outliers are excluded before the average is calculated, but the polling captures only a limited domestic trading window.
Gupta supports the shift, saying it promotes 'transparency, consistency, and fairness," and brings ETF pricing closer to physical gold. She added, 'What's important for AMCs is that this could significantly reduce operational and compliance burdens, as it eliminates the need for complex conversions and tax adjustments."
For instance, if gold trades at $3,000/oz in London, fund houses must convert that into grams, apply the rupee exchange rate, add duties, and adjust for domestic premiums—steps that vary across AMCs and update schedules.
That variation has real effects. Two gold ETFs holding identical assets can report different NAVs and performance.
'The idea behind this consultation paper is simple—ensure fair and consistent valuation of gold and silver ETFs across all AMCs," said Anil Ghelani, Head of Passive Investments & Products at DSP Mutual Fund.
Ghelani added that while the current system is still fair, Sebi's proposed approach is more straightforward and uniform. 'Think of it like how a stock is valued in an equity index fund or ETF. While referring to the closing price of a particular stock for valuation, no matter which AMC you look at, that price stays the same. That's the kind of consistency we're aiming for with valuation of gold and silver held in commodities ETFs too."
Domestic pricing: Simpler, but not without risks
Still, the proposal has its critics. Surendra Mehta, national secretary at IBJA, questioned both the motivations behind the move and the reliability of domestic mechanisms. 'The prices keep moving for 23 hours a day, see the basic reason why they don't want LBMA price, you know why, because LBMA charges them $48,000 per year. So, almost 40 lakh rupees a year…So, that is why Sebi is now looking for the alternative."
'Commodity exchanges, if polling price, they are not expert in taking the polling. It is just a platform. If the London Bullion Market Association, that is LBMA, is expert in London, then in India, who is expert? IBJA is expert. So, why they are not taking prices from IBJA?"
He noted that IBJA's twice-daily polling system is approved by the Reserve Bank of India.
Fund managers also warn of valuation drift if polling practices differ across providers. For example, IBJA polls twice daily; MCX uses a single closing price.
'Why does Kotak Gold ETF's NAV differ from SBI Gold ETF on the same day?" asked Rishabh Nahar, partner and fund manager at Qode Advisors PMS.
Without harmonized polling frequencies and pricing rules, NAVs could diverge even when holdings are identical, he cautioned. He also flagged a risk of "staleness" in NAVs, given that Indian pricing may miss global price movements that occur after local markets close.
'This staleness is significant: you could trade on a NAV that materially understates risk or overstates returns," Nahar said.
That vulnerability became especially apparent in March-April 2020, when pandemic-related disruptions caused gold ETFs in India to trade 7-9% above their NAVs, Nahar said.
Narinder Wadhwa, Managing Director & CEO of SKI Capital Services, said using Indian spot prices makes sense but warned of the risk of inconsistency. He stressed the importance of adhering to International Organization of Securities Commissions (IOSCO) standards for benchmarks, which require transparent methodology, conflict-of-interest controls, and solid governance.
For the new system to earn credibility, Wadhwa said, domestic providers must provide greater transparency: 'Transparency on panel composition, frequency of review, and audit mechanisms is limited in the public domain. Disclosures on how outliers are treated, how average prices are computed (median vs mean), and how inactive days are handled are essential for investor trust."
For the first time, both retail investors and fund managers would reference a shared, publicly disclosed domestic spot price, published by MCX or IBJA, eliminating the patchwork of AMC-specific adjustments that have long complicated comparisons.
'This clarity fosters trust—everyone sees identical inputs, and deviations between NAV and market price become easier to diagnose with the Sebi," Nahar said. In theory, this should reduce retail investor confusion about why two gold ETFs with identical holdings can trade at different NAVs, and help institutions streamline compliance and performance reporting.
But transparency introduces new questions—chief among them, whether the slower pace of domestic pricing will keep up with global volatility. Because Indian spot benchmarks are typically set just once or twice a day—unlike the near-24-hour global gold market—sharp overnight moves in London or New York won't be reflected in ETF NAVs until the next domestic pricing window.
'Moreover, retail investors who place buy orders before the domestic open effectively lock in yesterday's prices, then immediately face mark-to-market losses if overnight prices gapped up. Over time, this misalignment can erode confidence in ETF fairness," Nahar cautioned.
How Sebi addresses these concerns will determine whether the shift strengthens investor confidence, or undermines it.