SEBI to Expand Vault Manager Regulations: ETFs, Derivatives Now Covered as Physical Gold Custody Requirements Surge

SEBI to Expand Vault Manager Regulations: ETFs, Derivatives Now Covered as Physical Gold Custody Requirements Surge​

The Securities and Exchange Board of India (SEBI) has issued a comprehensive Consultation Paper signaling a major overhaul of the regulatory framework governing physical bullion storage. The paper proposes expanding the scope of the SEBI (Vault Managers) Regulations, 2021, to cover not only Electronic Gold Receipts (EGRs), but also all precious metals underlying Exchange Traded Funds (ETFs) and derivatives on bullion. This move aims to create a truly harmonized vaulting ecosystem across the entire Indian bullion market.

The regulations currently define standards for those handling gold deposited for EGR creation, but the rapid growth of ETFs and physically settled commodity derivatives means that a vast quantity of physical assets are stored outside of any uniform regulatory supervision. SEBI is moving to close this gap, ensuring consistent oversight regardless of the financial product used by investors.

Need for Regulatory Expansion in Bullion Vaulting​

The Indian securities market for precious metal products has witnessed significant expansion over recent years. Gold and Silver ETFs, along with physically settled derivative contracts on bullion, have shown sustained growth in assets under management (AUM) and investor participation. This growth, however, means that the physical backing gold of these instruments is currently stored under varied contractual arrangements.

The existing SEBI (Vault Managers) Regulations, 2021, are narrowly focused on EGRs. While this initial framework successfully integrated physical gold with securities market infrastructure, it does not extend to all bullion-based financial products. Consequently, the metal backing ETFs and derivatives is currently stored in specialized commercial vaults without being subject to the specific governance standards applicable to SEBI registered Vault Managers (VMs).

Key Amendments Proposed to VM Regulations, 2021​

The proposed amendments are designed to transition the regulatory framework from product-specific management towards a unified standard for bullion custody. The expansion of scope is set to encompass all physical bullion underlying SEBI specified products, including ETFs and derivatives on bullion.

A significant change relates to the financial stability of the intermediaries. The minimum net worth requirement for Vault Managers (VMs) has been increased from fifty crore rupees to seventy-five crore rupees in light of the expanded operational scope. This raise emphasizes the criticality and risk associated with safeguarding these high-value assets.

Furthermore, the regulations are being made more robust against modern risks. Security policies must now explicitly address fire, fraud, negligence, terrorism, cyber attacks, or any other threat to the bullion, providing a comprehensive layer of protection for deposited metals.

Strengthening Custody Standards and Risk Mitigation​

The regulatory push is aimed at ensuring operational resilience and strengthening investor protection across the board. The procedures are being thoroughly upgraded to deal with modern market complexities that were not covered in the initial 2021 framework.

VMs must now appoint a dedicated Compliance Officer, reporting directly to the Board. This officer is responsible for monitoring compliance with all relevant SEBI Acts and regulations. Such governance requirements mirror those already introduced via Master Circulars.

The standard of deposit has also been clarified through regulatory revisions. The terminology 'Gold' is being replaced universally by 'Bullion,' and the definition of 'Vaulting Service' covers the storage and safekeeping for any bullion related instrument, ensuring clear applicability across the segment.

Investor Focus: Consultation on Expanding the Scope​

SEBI seeks public comments on two primary proposals designed to harmonize the market. Proposal A involves the structural amendments to the VM Regulations. Proposal B includes a draft circular that will provide operational guidelines for vaulting services covering all SEBI specified bullion related instruments.

The proposed changes mandate rigorous tracking of metal movement. VMs must maintain detailed records regarding the deposit, transfer, and withdrawal/delivery of bullion across all instruments. This includes maintaining a minimum record period of five financial years.

In addition to operational checks like bi-fortnightly physical verification by Depositories, VM integrity is paramount. The regulations mandate that any loss or damage to the bullion must result in immediate notification and prompt action from the Vault Manager, with losses indemnified based on who was deposited—beneficial owner for EGRs, AMC/Custodians for ETFs, or derivatives owners.

The consultation paper emphasizes that this expanded regime will ensure consistent standards relating to vault infrastructure, governance, audit, and risk management across all regulated vaults in India. Interested stakeholders are requested to submit their comments by September 01, 2026, ensuring the continued development of a robust and trusted precious metals market.