Sebi Proposes Wider Role For Vault Managers Beyond Just Safeguarding Gold For EGRs

Securities and Exchange Board of India (Sebi) has proposed expanding the role of vault managers beyond just storing and safeguarding gold for Electronic Gold Receipts (EGRs). The new rules would also cover gold and silver held for exchange-traded funds (ETFs) and bullion derivatives.

The proposal, part of a consultation paper issued on August 11, seeks to widen the scope of the Sebi (Vault Managers) Regulations, 2021. The regulator said the aim is to have a common set of rules for vaults storing bullion for EGRs, ETFs, bullion derivatives and other regulated bullion products.

As of now, Sebi's vault manager regulations apply only to gold deposited for the creation of EGRs. The physical gold and silver held by ETFs and the bullion used for physically settled derivatives are stored in commercial vaults, but these arrangements are not covered by the same vault manager regulations.

Sebi said this has resulted in the same underlying asset being subject to different custody standards depending on the financial product through which investors hold exposure to it.

"Physical bullion underlying different Sebi regulated instruments may be subject to different standards despite representing the same underlying asset and being exposed to similar custody, storage and operational risks," the regulator said in the consultation paper.

The regulator is concerned about the growing amount of investor-owned gold and silver being concentrated in a limited number of vaults. It said these facilities have assumed systemic importance because they hold bullion that supports settlement and redemption of regulated products.

Sebi said the proposed expansion would "mitigate operational risks, ensure regulatory consistency across similar custody activities and strengthen investor protection in the Indian securities market."

The proposed framework would bring common standards for vault managers on infrastructure, governance, operational controls, insurance, cyber security, business continuity, audits and record keeping.

The regulator said the aim is to have "consistent standards relating to vault infrastructure, governance, eligibility criteria, operational controls, purity verification, insurance, cyber security, business continuity, audit, inspection, record maintenance and risk management across all regulated vaults."

The proposal also seeks to make vault managers responsible for reconciling physical bullion with records maintained by depositories, clearing corporations, asset management companies or custodians, as applicable.

The proposed rules would also expand the duties of vault managers beyond simply storing bullion. The draft framework also requires vault managers to cooperate with other vault managers, depositories, clearing organisations, asset management companies and custodians for "inter-vault settlements, transfer and withdrawal of bullion."

Security requirements are also set to become broader. The proposed framework seeks to apply common requirements for insurance, cyber security and business continuity to vaults holding bullion for different Sebi-regulated products.

Sebi has proposed that the regulatory framework be expanded from gold to "all physical bullion including gold, silver and such precious metals" that serve as the underlying assets of Sebi-regulated products and are held under Sebi's requirements.

The proposed changes would also bring bullion underlying derivatives contracts into registered vaults. The draft operating guidelines state that bullion underlying derivatives traded on Sebi-recognised stock exchanges "shall be stored in the registered Vaults" in accordance with the proposed regulations and related guidelines.

Sebi has also proposed a new set of operating rules for vaulting services. The draft circular includes separate guidelines for bullion underlying derivatives and standard operating guidelines for vault managers handling all Sebi-specified bullion-related instruments.

The proposed circular will keep separate rules for different bullion products where needed, while setting common minimum standards for storing bullion. Sebi said the framework is intended to "harmonise instrument-specific procedures while retaining common minimum standards across all bullion custody."

Once the new circular is issued, Sebi will withdraw the existing June 24, 2024 Master Circular for EGRs.

The capital markets watchdog said the proposed framework would "strengthen investor protection", improve transparency and auditability of bullion holdings and allow more effective regulatory supervision.

It has sought public comments on the proposals by September 1, 2026.