Enabling Dealings by IFSC – Banking Units in Bullion Unallocated Accounts

Context

To facilitate development of the bullion market in India, an enabling framework for Banking Units in IFSC to operate Unallocated Accounts has been  notified.

International Financial Service Centre

• The International Financial Services Centres Authority is a unified authority for the development and regulation of financial products, financial services and financial institutions in the International Financial Services Centre (IFSC) in India.
• IFSC has been designated for all practical purposes as a 'deemed foreign territory' which would have the same ecosystem as other offshore locations, but which is physically on Indian soil.
• Any financial institution (or its branch) set up in the IFSC is
  • treated as a non-resident Indian located outside India,
  • expected to conduct business in such foreign currency and with such entities, whether resident or non-resident, as the Regulatory Authority may determine, and
  • Nothing contained in any other regulations shall apply to a unit located in IFSC, subject to certain provisions.
• A bank in IFSC is not subject to CRR or SLR stipulations of RBI.
• Only one International Financial Services Centre is approved in a Special Economic Zone

Allocated vs Unallocated Account

• The investor can typically select between an unallocated deposit account and an allocated deposit account. 
• The gold is physically attributed to the account holder only in the case of allocated deposits in specially assigned accounts. 
• In the case of these allocated accounts, the bank cannot lend this gold and if the bank becomes insolvent, the bank’s creditors do not have an interest in this gold.
• A customer with an unallocated account is an unsecured creditor of the bullion bank or gold dealer.  
• Gold held in unallocated accounts, just like with many other bank deposits, may be lent by the bank

Objective of Regulations

• An enabling framework for Banking Units in IFSC to operate Unallocated Accounts for the purpose of trading, hedging and swapping with Physical Gold / Silver is being notified with the following objectives:
  • To mitigate the risks of the prospective clients of Banking Units who may be looking to buy/ sell or take positions in gold/silver or for the purpose of trading or to hedge their exposures in bullion.
  • To aid in financialization of gold as an asset class.