SEBI issues guidelines for calculation of concentration norms for Cat III AIFs | Product specifications issued for EGR segment/Gold Exchange

Pursuant to its previous circulars, SEBI has specified guidelines in respect of the following:

A. Calculation of investment concentration norm for Category III Alternative Investment Funds (Cat III AIFs):

Pursuant to the recent amendments to the SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations) providing flexibility to Category-III AIFs – to calculate investment concentration norms based either on investable funds or net asset value (NAV) while investing in listed equity of an investee company – SEBI has specified certain requirements for the calculation of investment norms. This would require Category-III AIFs to seek approval of their trustees or board of directors or designated partners, as the case may be, and inform the same to their investors within 30 days from the date of the issuance of the SEBI circular.

B. Product Specifications pertaining to Electronic Gold Receipt (EGR) Segment in India:

In furtherance of the framework notified by SEBI for operationalizing the gold exchange in India, SEBI has issued certain guidelines to be followed by stock exchanges for the launch of contracts with different denomination for trading and/ or conversion of EGR into gold.

The aforementioned changes are analyzed below:

A. Calculation of investment concentration norm for Category III AIFs

As you are aware, SEBI recently amended the general investment conditions for Cat III AIFs under the AIF Regulations vide notification dated March 16, 2022 (available here). This inter alia provides flexibility to Cat III AIFs, including large value funds for accredited investors of Cat III AIFs, to calculate investment concentration norm based either on investable funds or NAV of the scheme while investing in listed equity of an investee company.

Pursuant to the aforementioned amendment, SEBI has specified the following in this regard:

• Existing Cat III AIFs may opt for calculating the investment concentration norm based on investable funds with the approval of their trustees or board of directors or designated partners, as the case may be, and inform the same to their investors within 30 days from the date of the issuance of this circular i.e. within 30 days from March 28, 2022.
• All Cat III AIFs to disclose the basis for calculation of investment concentration norm in the placement memorandum of their schemes.
• The basis for calculating investment concentration norm not to be changed during the term of the scheme.
• Cat III AIFs which choose to calculate investment concentration norm based on NAV, shall comply with para 2 of SEBI circular no. SEBI/HO/IMD/IMD-I/DOF6/P/CIR/2021/663 dated November 22, 2021 (available here).

The above clarifications have been issued vide SEBI circular dated March 28, 2022 (available here).

B. Product Specifications pertaining to EGR Segment in India

Vide Circular no. SEBI/HO/CDMRD/DMP/CIR/P/2022/07 dated January 10, 2022 (available here) (January 10 Circular), SEBI had issued a framework operationalizing the gold exchange in India as per which inter alia the entire transaction in the EGR segment has been divided into three tranches:

Further, SEBI, vide Circular no. SEBI/HO/CDMRD/DMP/P/CIR/2022/19 dated February 14, 2022 (available here) (February 14 Circular), issued standard operating guidelines for the vault managers and depositories in the EGR segment.

In furtherance of the above, SEBI has specified the following guidelines for stock exchanges in respect of the launch of contracts with different denomination for trading and / or conversion of EGR into gold:

Provision	Explanation
Deposit of gold in the ‘deposit unit’ with registered vault managers	Any person desirous of dealing in EGR on the stock exchange shall deposit the gold with the registered Vault Managers, in the ‘deposit unit’, which shall be specified by the stock exchanges.
Trading to take place in the ‘trading unit’ of the stock exchanges | ‘Settlement unit’ same as ‘trading unit’ | Trading Unit of EGR to be specified to vault manager	Trading of EGR shall take place on stock exchanges, in the ‘trading unit’, which shall be specified by the stock exchanges. Stock exchanges shall ensure that trading unit is not smaller than 10th part of the corresponding deposit unit. For example: On deposit of 100gm gold bar, 1 EGR may be created of 100 gm trading unit or 10 EGRs may be created of 10gm each trading unit. The ‘settlement unit’ of EGR shall be same as ‘trading unit’, which shall be specified by the stock exchanges. At the time of creation of EGR, the beneficial owner of gold shall specify the trading unit of EGR, to the Vault Manager.
Procedure to obtain physical gold against EGRs | ‘Withdrawal unit’ of EGRs same as the ‘deposit unit’	Beneficial owner of EGR intending to obtain physical gold against the EGR/s, shall follow the procedure as stated in January 10 Circular. The ‘withdrawal unit’ of EGR shall be same as ‘deposit unit’, which shall be specified by the stock exchanges.
ISINs of EGRs to contain details of deposit unit and trading unit	In addition to ISIN norms specified in Annexure 2 of the February 14 Circular, the ISINs of EGRs shall also contain details of deposit unit and trading unit, for the purpose of easy identification by the investors.
Dissemination of adequate information to investors | Details of units to be spelt out in contract specifications	Stock exchanges to disseminate adequate information to investors, especially for EGRs with different deposit and trading unit. Details of deposit unit / withdrawal unit and trading unit / delivery unit shall be clearly spelt out in the contract specifications of the exchange.

The above guidelines have been specified by SEBI vide circular dated March 28, 2022 (available here).