Introduction of Silver Exchange Traded Funds in India

1.0 Objective:

1.1 This Board memorandum proposes to amend SEBI (Mutual Funds) Regulations, 1996
(hereinafter referred as “MF Regulations”), for introduction of Silver Exchange Traded
Fund Scheme (hereinafter referred as “Silver ETFs”).

2.0 Background:

2.1 Currently, under MF Regulations participation in goods/commodities is allowed only in

Gold and only through Gold ETFs. GETFs can invest in gold or gold related instruments.

2.2 In this regard, suggestions were received from Association of Mutual Funds in India
(AMFI), certain Asset Management Companies (AMCs), Multi Commodity Exchange of
India Limited (MCX) & Indian Bullion and Jewellers Association Ltd. (IBJA), for
introduction of Silver ETFs in India. The suggestions, inter-alia, highlighted the
following reasons for introduction of Silver ETFs:

a) As per the data submitted by MCX, India consumed around 2902 Metric Ton (MT) in
the year 2020, out of which industrial demand for Silver was around 832 MT,
jewellery and silverware demand was around 1801 MT and demand for investment in
physical Silver was around 269 MT.
b) Demand for investment in physical Silver in India was 269 MT in 2020 that amounts
to INR 1738 Crores at current market prices (as on September 07, 2021).
c) Unlike Gold, Silver is bulkier as is significantly cheaper to Gold and prone to
oxidation and is thus relatively cumbersome to invest into physical form in larger
quantities. Moreover, the secondary market for physical silver is often fraught with
wide spreads. Currently, silver can either be bought in physical form or in commodity
futures.
d) There is a latent demand from investors for investing in Silver through a financial
instrument such as an ETF, since Silver has gained popularity as an inflation hedge
 alongside gold. Silver can offer a long-term diversification to an investor, whereby
they can have exposure to Silver through an ETF, rather than holding the physical
Silver. ETFs provide liquidity, are readily traded and are easily accessible to
individual investors.
e) As India is import dependent for Silver, permitting Silver ETFs that are partly backed
by derivatives will help in reducing Silver imports into the country.
f) Silver ETFs may encourage and benefit retail investors, traders and hedgers, to
participate in the mutual fund ecosystem.
g) Silver is a precious metal like Gold and considering that the Gold ETFs have been
functioning smoothly since the time they were introduced in India over 14 years ago,
the need for introduction of Silver ETF is imminent.
h) Further, it is mentioned that ETFs offer ease of investing, efficiency, convenience,
ease of entry and exit, etc. at a low cost. ETFs would do away with investors’ worries
about storage and purity.

3.0 Discussions in Mutual Fund Advisory Committee (MFAC)

3.1 The agenda on “Introduction of Silver Exchange Traded Funds (ETFs)” incorporating
aforesaid suggestions was discussed in the Mutual Fund Advisory Committee (MFAC)
meeting held on July 15, 2021. The Committee deliberated on the agenda and
recommended the following:
3.1.1 Introduction of Silver ETFs in the country is desirable considering the existence of Gold
ETFs for the past decade. Silver ETFs may be introduced in line with the existing
regulatory mechanism for Gold ETFs.

3.1.2 The proposed framework for Silver ETFs may be as under:

3.1.2.1 Investment Objective: To generate returns that are in line with the performance of
physical Silver in domestic prices, subject to tracking error.
3.1.2.2 Type of Investments:

a. Shall primarily invest in Silver and Silver related instruments as specified by the
Board from time to time.

b. Physical Silver of 30 kg bars with fineness of 999 parts per thousand (or 99.9%
purity) conforming to London Bullion Market Association (LBMA) Good Delivery
Standards may only be permitted.

c. Exchange Traded Commodity Derivatives (ETCDs) with Silver as underlying may

be considered as Silver related instruments. The exposure limits towards Silver
ETCDs by the Silver ETFs may be capped at 10% of the Net Asset Value (NAV)
taking into account the higher annualized rolling over expenses in Silver ETCDs.

However, if the intention is to take delivery of physical Silver and not to rollover the
position to next contract cycle, then the limit of 10% on Silver ETCD may not be
applicable.

d. Pending deployment of funds, Silver ETFs may invest in short term deposits of
scheduled commercial banks.

3.1.2.3 Asset Allocation:

Sl. Asset Type Exposure (as % of net assets
No. of the scheme)
i. Silver and Silver related instruments Minimum 95%
(including Silver ETCDs)
ii. Cash and cash equivalent Maximum 5%

3.1.2.4 Disclosure of Net Asset Value (NAV): The NAV of Silver ETFs may be disclosed on
daily basis.

3.1.2.5 Valuation of Silver: Silver may be valued based on the AM fixing price of LBMA for
Silver in line with the methodology for valuation of Gold for Gold ETFs.

3.1.2.6 Liquidity:

a. Units of Silver ETFs may be listed on the recognized Stock Exchange(s).

 b. The AMC shall appoint Authorized Participants (APs) to provide liquidity for the
units of Silver ETF in secondary market on an ongoing basis.

c. APs and Large Investors may be allowed to directly buy/sell Units with the Mutual
Fund in creation unit size.

3.1.2.7 Tracking Error: The tracking error of Silver ETFs, i.e. the standard deviation of the
difference between price of Silver and the NAV of Silver ETF, may not be more than 2%.

3.1.2.8 Disclosure of Risk: In Scheme Information Document (SID) of Silver ETFs, following
may also be disclosed:

Tracking error, market risk due to volatility in silver prices, liquidity risks in physical or
derivative markets impairing the ability of the fund to buy and sell Silver, risks associated
with handling, storing and safekeeping of physical Silver; taxation both direct and
indirect as may be revised by the Government that can lead to change in value of the
physical and/or units of Silver ETFs.

3.1.2.9 Benchmark: LBMA Silver daily spot fixing price.

3.1.2.10 Appointment of Custodian: The mutual fund shall appoint a custodian registered with
the Board to keep custody of Silver and Silver related instrument of Silver ETF held in
terms of MF Regulations. The custodian should also provide such other custodial
services as may be authorized by the trustees.

3.1.2.11 Total Expense Ratio (TER): Currently, the maximum TER applicable for ETFs is 1% of
the daily net assets. The TER of Silver ETFs including the investment and advisory fees
may not exceed 1% of the daily net assets. The recurring expenses within TER among
other expenses may include the expenses incurred towards storage and handling of
Silver.

3.1.2.12 Cut-off timings: The cut-off time for receipt of valid application by the mutual fund for
subscriptions/ redemptions from APs/ Large Investors would be 3.00 p.m. on any
business day and the said transaction may be at intra-day NAV, based on the executed
price at which the assets or securities representing the underlying portfolio are purchased
/ sold.
3.1.2.13 Dedicated Fund Manager: As ‘commodities’ belong to a separate asset class, for
launching Commodity ETFs (such as Gold ETFs and Silver ETFs) a dedicated fund
manager with relevant skill and experience in commodities market including commodity
derivatives market may be appointed. However, it may not be necessary to have a
separate dedicated fund manager(s) for each Commodity ETF.

3.1.2.14 Other applicable Provisions: All other provisions including disclosure requirements,
cumulative gross exposure limit not exceeding 100% of the net assets of the scheme,
half yearly reporting by trustees, physical verification of gold underlying the Gold ETF
units by statutory auditors of mutual fund schemes, etc. as applicable to Gold ETFs may
be made applicable to Silver ETFs.

3.2 Considering the recommendations of MFAC and subsequent internal discussions, with
regard to disclosure of NAV, valuation, creation unit size and disclosure of tracking error
& tracking difference, the following are proposed:

3.2.1 Disclosure of NAV: Along with the disclosure of end of day NAV, both Gold ETFs and
Silver ETFs may be mandated to disclose indicative intra-day NAV on continuous basis
as per the methodology specified by SEBI from time to time.

3.2.2 Creation unit Size: AMCs may decide the creation unit size for Silver ETFs and disclose
the same in the offer documents.

3.2.3 Disclosure of Tracking Error & Tracking Difference: Currently, there is no mandatory
limit prescribed for ETFs and Index Funds with regard to tracking error and the provision
only says that the AMC will endeavor to keep the tracking error within 2%. However, in
order to avoid deviation of the portfolio of Silver ETFs from the underlying asset class,
MFAC has recommended that tracking error for Silver ETFs may not exceed 2%.
In this regard, it is proposed that for both Gold ETFs and Silver ETFs the tracking error
may not exceed 2%, however if the tracking error exceeds 2% due to some unavoidable
circumstances in the nature of force majeure which are beyond the control of the AMCs,
the same may be allowed subject to certain conditions.
 Along with the disclosure of tracking error, both Gold ETF and Silver ETF schemes may
also be mandated to disclose tracking difference i.e. the difference between the returns of
the ETF and the underlying asset class.

4.0 Operating Guidelines

4.1 The operating guidelines for introduction of Silver ETFs including asset allocation,
specification for physical Silver, participation in ETCD having Silver as underlying,
determination of NAV, benchmark, reporting, disclosures including tracking error &
tracking difference, dedicated fund manager, physical verification of Silver underlying
the Silver ETF units, etc. will be implemented by issuance of a circular.

5.0 Proposals:

5.1 The recommendations of MFAC at paragraph 3.1.1 and 3.1.2 above may be accepted
with modification as proposed at paragraph 3.2. Accordingly, it is proposed to amend MF
Regulations for:
5.1.1 Introduction of Silver ETFs in line with the existing regulatory mechanism for Gold
ETFs;
5.1.2 Incorporating changes as required for introduction of Silver ETFs.
5.2 The amendments to MF Regulations may be made applicable from the 30th day of its
publication in the Official Gazette.
5.3 The proposed draft amendments to MF Regulations are placed at Annexure-A. The draft
notification for amendments to MF Regulations is placed at Annexure-B.

6.0 Proposals for consideration and approval of the Board:

6.1 The Board may consider and approve the proposals at paragraph 5.0 above.
6.2 The Board may authorize the Chairman to make such necessary, consequential or
incidental changes to the SEBI (Mutual Funds) Regulations, 1996 and the consequent
steps deemed appropriate to give effect to the decision.
 Annexure-A

This has been excised for reasons of confidentiality.

 Annexure-B

This has been excised for reasons of confidentiality.