Meta-morphed: A corporate bond that puts $27 billion off-the-balance-sheet

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Meta structures a data center investment funding with cash flows linked with rentals and guarantees

– Vinod Kothari | finserv@vinodkothari.com

In India, we often say: upar wala sab dekhta hai (God sees it all). However, if I could do things which God the almighty does not or cannot see, I will be most happy to do those. Doing things off-the-balance-sheet is always equally tempting; structurers of Frankenstein financial instruments have already tried to bring ingenuity to explore gaps in accounting standards to create such funding structures where the asset or the relevant liability does not show on the books. Recently, a $ 27 billion bond issuance by an SPV called Beignet Investor, LLC may have the ultimate effect of keeping the massive investment done at the instance of Meta group  kept off-the-balance-sheet. 

Structural Features

Essentially, the deal involves issuance of  bonds to the investors, the servicing of which is through the cash flows generated from the lease payments. Further, a residual value guarantee has been provided by the group entity which has again led to a rating upliftment for the bonds issued. 

The essential structure of the transaction involves a combination of project finance, lease payments and a residual value guarantee to shelter investors from project-related risks, and use of an operating lease structure, apparently designed to keep the funding off the balance sheet of Meta group. It is a special purpose joint venture which keeps the funding liability on its balance sheet.

Let us understand the transaction structure:

  • Meta intends to do a huge capex to build a massive 2.064-GW data center campus in Richland Parish, LA. The cost of this investment is estimated at $27 billion in total development costs for the buildings and long-lived power, cooling, and connectivity infrastructure at the campus. The massive facility will take until 2029 to finish.
  • The expense will be incurred by a joint venture, formed for the purpose, where Meta (or its group entities) will hold a 20% stake, and the 80% stake will come from Blue Owl Capital. The two of them together form the JV called Beignet Investor, LLC (issuer of the bonds).
  • The JV Co owns an entity called Laidley LLC, which will be the lessor of the data center facilities.
  • The lessee is a 100% Meta subsidiary, called Pelican Leap LLC, which enters into 4 year leases for each of the 11 data centers. Each lease will have a one-sided renewal option with 4 years’ term each, that is to say, a total term at the discretion of the lessee adding to 20 years. The leases are so-called triple-net (which is a term very commonly used in the leasing industry, implying that the lessor does not take any obligations of maintenance, repairs, or insurance). 
  • The 20-year right of use, though in tranches of  4 years at a time, will mean the rentals are payable over as many years. This is made to coincide with the term of amortisation of the bonds issued by the Issuer, as the bonds mature in 2049 (2026-2029 – the development period, followed by 20 years of amortisation).
  • If the lease renewal is at the option of the lessee, then, how is it that the lease payments for 20 years are guaranteed to amortise the bonds? This is where the so-called “residual value guarantee” (RVG) comes in. RVG is also quite a common feature of lease structures. In the present case, from whatever information is available on public domain, it appears that the RVG is an amount payable by Meta Platforms under a so-called Residual Value Guarantee agreement. The RVG on each renewal date (gaps of 4 years) guarantees to make a payment sufficient to take care of the debt servicing of the bonds, and is significantly lower than the estimated fair value of the data center establishment on each such date. 

The diagram below by provides for the transaction structure: 

Off-balance sheet: Gap in the GAAP?

Of course, as one would have expected, the rating agency Standard and Poor’s that was the sole rating agency having given rating for the bonds, its report does not say the structure is off-the-balance sheet for the lessee, a Meta group entity. However, various analysts and commentators have referred to this funding as off-the-balance sheet. For example, Bloomberg report  says “The SPV structure helps tech companies avoid placing large amounts of debt on their balance sheets”. Another report says that the huge debt of $ 27 billion will be on the balance sheet of Beignet, the JV, rather than on the books of Meta. An  FT report says that bond was priced much higher than Meta’s balance sheet bonds, at a coupon of 6.58%, as a compensation for the off-balance sheet treatment it affords. A write up on Fortune also refers to this funding as off-the-balance sheet. 

In fact, Meta itself, on its website, gives a clear indication that the deal was struck in a way to ensure that the funding is not on the balance sheet of Meta or its affiliates. Here is what Meta says: 

“Meta entered into operating lease agreements with the joint venture for use of all of the facilities of the campus once construction is complete. These lease agreements will have a four-year initial term with options to extend, providing Meta with long-term strategic flexibility.

To balance this optionality in a cost-efficient manner, Meta also provided the joint venture with a residual value guarantee for the first 16 years of operations whereby Meta would make a capped cash payment to the joint venture based on the then-current value of the campus if certain conditions are met following a non-renewal or termination of a lease.”

Here, two points are important to understand – first, the operating lease/financial lease distinction, and second, the so-called residual value guarantee – what it means, and why it is opposite in the present case.

The distinction between financial and operating leases, the key to the off-balance sheet treatment of operating leases, was the product of age-old accounting standards, dating back to the 1960s. In 2019, most countries in the world decided to chuck these accounting standards, and move to a new IFRS 16, which eliminates the distinction between financial and operating leases, at least from the lessee perspective. According to this standard, every lease will be put on the balance sheet, with a value assigned to the obligation to pay lease rentals over the non-cancellable lease term.

However, USA has not aligned completely with IFRS 16, and decided to adopt its own version called ASC 842 for lease accounting. The US accounting approach recognises the difference between operating leases and financial leases, and if the lease qualifies to be an operating lease, it permits the lessee to only bring an amount equal to the “lease liability”, that is, the discounted value of lease rentals as applicable for the lease term.

As to whether the lease qualifies to be an operating lease, or financial lease, one will apply the classic tests of present value of “lease payments” [note IFRS uses the expression “minimum lease payments”], length of lease term vis-a-vis the economic life of the asset, existence of any bargain purchase option, etc. “Lease payments” are defined to include not just the rentals payable by a lessee, but also the minimum residual value. This is coming from para 842-10-25-2(d). The reading of this para is sufficiently complicated, as it makes cross references to another para referring to a “probable payment” under “residual value guarantees”. The reference to para 842-10-55-34 may not be needed in the present case, as the residual value agreed to be paid by the lessee is included in “lease payment” for financial lease determination by virtue of the very definition of financial lease. Therefore, it remains open to interpretation whether the leases in the present case are indeed operating leases.

Considering that the residual value guarantee from the parent company in the present case may not meet the requirements for its inclusion in “lease payments”, it is unlikely that the lease payments over any of the 4 year terms will meet the present value test, to characterise the lease as a financial lease. Also, the economic life of the commercial property in form of the data centers may be significantly longer than the 20 year lease period, including the option to renew. Hence, the lease may quite likely qualify as an operating lease.

Residual value guarantee: Rationale and Implications

In lease contracts, a residual value guarantee by the lessee is understandable as a conjoined obligation with fair use and reasonable wear and tear of assets. In the present case, if the lessee is a tenant for only 4 years, and the renewal thereafter is at the option of the lessee. If the lessee chooses not to renew the lease, the lessee is exercising its uncontrolled discretion available under the lease. So, what could be the justification for the parent company being called to make a payment for the residual value of the property? After all, the property reverts to the lessor, and whatever is the value of the property then is the asset of the lessor. 

In the present case, it seems that the RVG comes under a separate agreement – whether that agreement is linked with the leases is not sure. However, for the holistic understanding of any complicated transaction, one always needs to connect all the dots together to get a a complete understanding of the transaction. If the lessee or a related party is paying for future rentals, it transpires that the understanding between the parties was a non-cancelable lease, and the RVG is a compensation for the loss of future rentals to the lessor. If that is the overall picture, then the lease may well be characterised as a financial lease.

Is the lessee’s balance sheet immune from the bond payment liability?

A liability is what one is obligated to pay; a commitment to pay. The $ 27 billion liability for the bonds in the present case sits on the balance of the JV Company. However, the question is, ultimately, what is it that will ensure the repayment of these bonds? Quite clearly, the payment for the bonds is made to match with the underlying lease payments, with a target debt service coverage. In totality, it is the lease payments that discharge the bond obligation; there is nothing else with the JV company to retire or redeem the bonds. From this perspective as well, an off-balance-sheet treatment at the lessee or at the group level seems tough.

However, off-balance-sheet may not be the objective really. What matters is, does the structure insulate Meta group from the risks of the payments from the data center. From the available data, it appears that the project related risks, from delays in completion to non-renewal, are all taken by Meta. Therefore, even from the viewpoint of project-related risks, there do not seem to be sufficient reasons for any off-balance sheet treatment.

Disclaimer: The analysis in the write-up above is limited to the reading that could be done from write-ups/materials in public domain.  

Other Resources:

Relaxing FEMA reforms to boost global trade

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– Saloni Khant, Executive | corplaw@vinodkothari.com

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Resource Centre on FEMA

Corporate  Treasury Centres: Managing your money with a window to the world

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– Payal Agarwal, Partner | payal@vinodkothari.com 

Global/ Regional Corporate Treasury Centres (GRCTCs) set up in IFSCs, are recognised as Finance Companies under the IFSCA (Finance Company) Regulations, 2021. An updated Framework for Finance Company/Finance  Unit  undertaking  the activity  of  Global/ Regional Corporate Treasury Centres was issued on 4th April, 2025 in order to encourage ease of doing business and in alignment with the international best practices, after a public consultation on the same.

The Union Budget 2025-26 also provided specific tax incentives for transactions involving GRCTC, exempting such transactions from the purview of deemed dividend under section 2(22)(e) of the Income Tax Act, 1961. Vide a recent amendment to Companies (Meetings of Board and its Powers) Rules, 2014, published on 6th November, 2025 in the Official Gazette, Finance Companies undertaking the activities of GRCTCs have been exempt from the application of section 186 of the Companies Act, 2013 with respect to compliances pertaining to granting of loans, making investments, providing security or guarantee. 

What is a GRCTC? 

Simply put, a treasury centre is supposed to be an in-house bank, managing funds and providing liquidity across different entities in the group. Thus, the main objective of a GCRTC is to manage funds centrally and optimise the use of funds within the various entities of the group. Key responsibilities include intra-group financing, managing cash and liquidity and providing financial advisory services to group entities.

Activities of Global/ Regional Corporate Treasury Centres (GRCTC)

Service Recipients [Clause 12] Permissible Activities [Clause 13]
  • Group Entities of GRCTC [Clause 2(1)(d)]
    • Subsidiary-Parent (Ind AS 110/AS 21)
    • Joint venture (Ind AS 28/ AS 27)
    • Associate (Ind AS 28/ AS 23)
    • Related Party (Ind AS 24/ AS 18)
    • Common brand name 
    • Investment in equity shares > 20%
    • Group Entities of Parent [Clause 2(1)(g)]
    • Parent in case of FC – group entities desirous to set up FC to undertake GRCTC 
    • Parent in case of FU – entity desirous to set up branch to undertake GRCTC
  • Branches of Parent/ Group Entities 
  • Parent/ Group Entities may either be Person Resident in India (PRI) or Person Resident Outside India (PROI) 
  • Raising capital by issuance of equity shares;
  • Borrowing including in the form of inter-company deposits; 
  • Credit arrangements; 
  • Transacting or investing in financial instruments issued in IFSC or outside IFSC; 
  • Undertaking derivative transactions (Over the counter (OTC) and Exchange traded);
  • Foreign exchange transactions in such currencies as specified by the Authority;
  • Factoring and Forfaiting;
  • Acting as a Re-invoicing centre; 
  • Liquidity management;
  • Maintaining relationships with financial counterparties;
  • Management  of  obligations  of  its  service  recipients  towards  insurance  and  pension related commitments;
  • Advisory  service  related  to  aforesaid activities, and relating to: 
    • financial management including financial risk management; 
    • funding and capital market activities;
  • Acting as a holding company; 
  • Any other activity, notified u/s 3(1)(e)(xiv) of IFSC Act, with the prior approval of the Authority

Borrowing and Lending by GRCTCs – Compliance Considerations and Tax Implications 

Compliance with FEMA Directions

Pursuant to the notification of the FEM (International Financial Services Centre) Regulations, 2015, any financial institution or branch of a financial institution set up in the IFSC and permitted/ recognised as such by the Government of India or a Regulatory Authority shall be treated as a person resident outside India. A Finance Company established in IFSC, including GRCTC, is recognised as a financial institution and hence, shall be treated as a person resident outside India (PROI) for the purpose of FEMA Directions. 

Therefore, from compliance perspective, the applicability of FEMA Directions may be understood as follows: 

Lender Borrower  Applicability of FEMA Directions
Person Resident Outside India  GRCTC Not applicable 
GRCTC  Person Resident Outside India  Not applicable 
GRCTC  Person Resident in India  Applicable 
Person Resident in India  GRCTC  Applicable 

Thus, the borrowing/ lending between a GRCTC and an Indian company will be governed by the FEM (Borrowing and Lending) Regulations, 2018. The Draft Foreign Exchange Management (Borrowing and Lending) (Fourth Amendment) Regulations, 2025, issued on 3rd October 2025 contains a proposal on explicit inclusion of entities in IFSC as a recognised lender for the purpose of External Commercial Borrowings (ECBs). 

Compliance requirements under Companies Act, 2013 

GRCTC is a Finance Company or Finance Unit, incorporated as a company under the Companies Act, 2013 or as a branch of such a company. Therefore, compliance with the provisions of the Companies Act, 2013 attract. Certain exemptions are also extended to IFSC entities from the provisions of the Companies Act. Refer to the table below: 

Activities by GRCTC  Applicable provisions  Relaxation to GRCTCs 
Lending by GRCTC  Section 179 – Approval of Board  May be taken through circular resolution instead of board meeting
Section 186 – Limit on loans, investments, guarantee, security Unanimous approval of board Approval of shareholders Minimum rate of interest on loans Disclosure in financial statements Maintenance of registers   Does not apply, exemption granted to GRCTCs vide the Companies (Meetings of Board and its Powers) (Amendment) Rules, 2025 notified on 6th November, 2025
Borrowing by GRCTC  Section 179 – Approval of Board  May be taken through circular resolution instead of board meeting
Section 180  –  Limits on borrowings and approval of shareholders  Does not apply in case of private companyIn case of public company, relaxations may be provided through the Articles

Tax implications 

The tax benefits available to IFSC units coupled with the exemption granted to GRCTC vide the Finance Act, 2025 incentivise fund raising from foreign sources in India. For instance, an Indian group incorporates a GRCTC in IFSC. The GRCTC may avail borrowings from non-residents, and lend the same to the Indian company. In such a case, the following tax benefits attract: 

  • The GRCTC borrows money from a non-resident. The interest paid on such borrowings is exempt from tax in terms of section 10(15)(ix) of the IT Act, 1961. Since the interest income itself is exempt, the question of withholding tax does not arise. 
  • GRCTC is merely a treasury centre, the funds will ultimately be utilised by one or more of the group entities. To this end, lending/ borrowing between a GRCTC and its group entities is exempt from the application of deemed dividend u/s 2(22)(e) of the IT Act. 

In terms of section 2(22)(e) of the IT Act, loans or advances by a closely held company to the following are taxable as “deemed dividend” under income from other sources: 

  • Shareholder holding 10% or more of the voting power of such company, 
  • Any concern in which such shareholder is a member or a partner and in which he has a substantial interest (beneficial entitlement to 20% or more of the voting power) 

Sub-clause (iia) of the said section read with Explanation 3 thereto, provides exemption from such treatment where one of the entity is a GRCTC for undertaking treasury activities/ services and the parent entity/ principal entity is listed on the stock exchange of a country or territory outside India (except for countries falling under the restricted list notified by CBDT, if any). 

  • Pursuant to the exemptions granted to a Finance Company vide notification dated 7th March 2024, no TDS is required to be deducted on the interest income on ECBs/ loans as required in terms of section 195/ 194A of the IT Act. 
  • Interest income of GRCTC qualifies for tax holiday in terms of section 80LA of the IT Act. 

Concluding Remarks 

GRCTC seems to be an effective means of managing the finances of large groups, with an access to the world at large, towards the funding needs of the group. The non-resident status under FEMA coupled with the income tax exemptions and the exemptions from procedural compliances under the Companies Act makes it easier to manage the group wide funds, with more flexibility and lesser compliance burden. 

https://vinodkothari.com/resources-on-ifsca/

Data Privacy Law and Rules notified: 18 months’ time to implement

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Referral or Representation? The Fine Line Between LSP, DSA and Referral Partner

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Simrat Singh & Sakshi Patil | finserv@vinodkothari.com

India’s lending landscape is evolving from traditional, branch-led lending to digital and now “phygital” models, involving multiple intermediaries connecting borrowers and lenders. For regulated entities (REs), three different terms referring to loan intermediaries are commonly seen: Lending Service Providers (LSPs), Direct Selling Agents (DSAs) and Referral Partners. 

At first glance, these roles may appear similar since all “bring in business.” But as far as the RBI is concerned, the difference determines how much regulatory oversight the lender must exercise over these participants. This article attempts to answer who’s who in this lending chain, and more importantly, where a simple referral ends and a regulated lending function begins.

The Lending Trio: LSPs, DSAs and Referral Partners

LSPs: The digital lending backbone

In the digital lending framework, the most central participant is the LSP who are engaged by the REs to carry out some functions of RE in connection with its functions on digital platforms. These LSPs may be engaged in customer acquisition, underwriting support, recovery of loan, etc. The RBI’s Digital Lending Directions, 2025 define an LSP as:

“An agent of a RE (including another RE) who carries out one or more of the RE’s digital lending functions, or part thereof, in customer acquisition, services incidental to underwriting and pricing, servicing, monitoring, or recovery of specific loans or loan portfolios on behalf of the RE, in conformity with the extant outsourcing guidelines issued by the Reserve Bank.”

The emphasis on the term “agent” is crucial since being an agent becomes a precondition to becoming an LSP. An agent is a person employed to act for another; to represent another in dealings with third persons within the overall authority granted and can legally bind the principal by their actions (more discussion on agency later). This distinguishes an agent from a mere vendor or service provider who delivers a contracted service but has no authority to affect the principal’s relationship with third parties and neither is subjected to a degree of control from the principal.

DSAs: The traditional middle ground

DSAs, though not formally defined by the RBI, their appointment, conduct and RE’s oversight on them is governed by Annex XIII of the SBR Directions (Instructions on Managing Risks and Code of Conduct in Outsourcing of Financial Services by NBFCs) for NBFCs and by Guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by Banks for Banks. DSAs operate largely in physical or “phygital” lending models, focusing on loan sourcing. They represent the lender while dealing with potential borrowers. However, their functions are narrower than those of an LSP. A DSA’s role typically ends with lead generation and preliminary documentation, without involvement in underwriting, servicing or recovery. While the DSA is an agent, it plays a more limited role in the lending value chain and has minimal borrower-facing obligations post origination.

Referral Partners: The nudge before negotiation

Referral Partners perform the most limited role. They simply share leads or basic borrower information with the lender and have no authority to represent or bind the lender. Their role is confined to referral i.e. the providing the first nudge to the lender. They are treated as independent contractors or service providers, not agents and operate under commercial referral agreements. The RE does not exercise control over their operations, nor is it responsible for their actions beyond the agreed referral activity. The distinction lies not in what they do (introducing borrowers) but in what they cannot do i.e. represent the lender or perform any of its lending functions.

Referral ≠ Representation: The Agency Test

The most important question then arises “How does one determine whether a person is an LSP, DSA, or a referral partner?”. All three may assist in borrower acquisition, but the answer might lie in distinguishing referring from representing. To be classified as an LSP (or even a DSA), the person must first be the agent of the RE, not just a vendor or service provider. The test of agency has been laid down in the Supreme Court’s decision in Bharti Cellular Ltd. v. Commissioner of Income Tax1. The Court, in para 8, observed that the existence of a principal–agent relationship depends on the following elements:

  1. The authority of one party to alter the legal relationship of the other with third parties;
  2. The degree of control exercised by the principal over the agent’s conduct (less than that over a servant, but more than over an independent contractor);
  3. The existence of a fiduciary relationship, where the agent acts on behalf of and under the guidance of the principal;
  4. The obligation to render accounts to the principal, and the entitlement to remuneration for services rendered.

Further, the Court clarified in para 9 that the substance of the relationship, not just its form, determines whether agency exists. If a person is neither authorised to affect the principal’s relationship with third parties nor under its control, and owes no fiduciary obligation, the person is not an agent, regardless of what the contract calls them. 

Similarly, in Bhopal Sugar Industries v. Sales Tax Officer2, the Supreme Court had observed that the mere word ‘agent’ or ‘agency’ is not sufficient to lead to the inference that parties intended the conferment of principal-agent status on each other. Mere formal description of a person as an agent is not conclusive to show existence of agency unless the parties intend it so hence, “the true relationship of the parties in such a case has to be gathered from the nature of the contract, its terms and conditions, and the terminology used by the parties is not decisive of the said relationship.”

On the aspect of supervision and control, the Supreme Court in para 40 of the Bharti Cellular ruling stated:

An independent contractor is free from control on the part of his employer, and is only subject to the terms of his contract. But an agent is not completely free from control, and the relationship to the extent of tasks entrusted by the principal to the agent are fiduciary….The distinction is that independent contractors work for themselves, even when they are employed for the purpose of creating contractual relations with the third persons. An independent contractor is not required to render accounts of the business, as it belongs to him and not his employee.

In lending transactions, therefore, the relevant considerations to determine whether an agency exists or not may be:

  1. Does the agency have the authority, under a contract with the principal, to represent the principal to create any relationship with the borrower?;
  2. Does the agency have the authority to approach potential borrowers, representing that the agency can source a loan from the RE?;
  3. What is the role of the agency in the loan contract – is the loan contract established between the lender and the borrower through the agent?;
  4. Does the agency agreement control/regulate the manner of the agent’s dealings with the borrowers?;
  5. Effectively, is the agency the interface between the RE and the borrowers?

Paanwala and the Poster: Not everyone who sells a loan lead is an LSP

To illustrate the difference between LSP/DSA and Referral Partner, consider a simple example. You stop at your neighbourhood paanwala for your regular paan or pack of mints. Between the faded ads for mobile recharges and UPI QR codes, one new poster catches your eye “Need a personal loan? Look No Further ! Fast approvals”. Curious, you ask if the shopkeeper has joined the finance world. Smiling, he replies, “Arre nahi sahib, I just share numbers! You give me your name and phone number, I’ll send it to my guy. If your loan gets approved, I get a small tip!” No exchange of KYC documents, no app, no credit score. Now, does this make the paanwala an LSP under the Digital Lending Directions? He may appear as performing a part of the customer acquisition function of the lender so should he now comply with outsourcing norms, data protection protocols and grievance redressal requirements? Of course not.

The paanwala is a pure referral partner. His role ends with introducing a potential borrower to a contact connected to a lender. He does not represent the lender, verify or collect documents, underwrite, service, or recover loans, nor can he legally bind the lender through his actions. Mere referral, without agency and without performing a lending function, does not make one an LSP. Passing a phone number over a cup of chai does not amount to digital intermediation.

BasisReferral PartnerLSP
Scope of activityLimited to sharing leads with the lenderPerforms one or more of the lenders functions w.r.t in customer acquisition, services incidental to underwriting and pricing, servicing, monitoring, recovery
Access to prospective customer’s information and documentsOnly basic contact information necessary for the lender to approach the customer for the loan is sharedTo the extent relevant for carrying out its functions
RepresentationDoes not represent the RERepresents the RE
Agency & PrincipalNot an agentAppointed as an agent
DLGCannot provideCan provide (in case of Digital Lending and Co-lending)
Applicability of Outsourcing GuidelinesNot applicableApplicable
Mandatory due diligence  before appointmentNot applicableApplicable
Appointment of GRONo such requirementLSP having interface with borrower needs to appoint a GRO
Right to auditNo right of RERE has a right
Disclosure on the website of the lenderNot applicableApplicable

Table 1: Distinction between Referral Partner and LSP

Conclusion

As digital lending continues to expand in India, ensuring that every intermediary’s role aligns with its true legal character is essential. The key in determining the true nature of the relationship would ultimately rest on the contractual terms that must reflect the true nature of the relationship. Misclassifying these entities can expose lenders to compliance risks under RBI’s outsourcing and digital lending guidelines.

  1. [2024] 2 S.C.R. 1001 : 2024 INSC 148 ↩︎
  2. 1977 AIR 1275 ↩︎

Our resources on the same:

  1. Lending Service Providers for digital lenders: Distinguishing agency contracts and principal-to-principal contracts
  2. Principles of Neutrality for Multi-Lender Platforms
  3. Multi-lender LSPs – Compliance & Considerations
  4. Outsourcing (Direct Selling Agent) v. Business Correspondent route
  5. Resources on Digital Lending

Virtual Certificate Course on Grooming of Chief Compliance Officers of NBFCs

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Register here: https://forms.gle/qGvbWxup1QrvpQb9A

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Refer our other resources:

  1. Tech-driven compliance monitoring and validation of internal models
  2. Compliance-o-meter: From abstraction to structured granular assessment
  3. Compliance Risk Assessment
  4. Enhanced Corporate Governance and Compliance Function for larger NBFCs

12 hours Certificate Course on Insider Trading for Compliance Officers

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Prohibition of Insider Trading – Resource Centre

Representation on Consolidation of Directions 

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– Team Finserv | finserv@vinodkothari.com

In line with the Statement on Development and Regulatory Policies released by the Reserve Bank of India on October 10, 2025, we have submitted our representation on the draft directions issued thereunder. The submission presents our detailed observations, analysis, and suggestions aimed at facilitating the finalisation of a balanced and practical regulatory framework for Non-Banking Financial Companies (NBFCs).

Our recommendations are intended to support the regulatory objectives of transparency, prudence, and stability, while ensuring operational feasibility for the industry.

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Digi to dizzy highs: Digital gold shines in regulatory dark spot

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– Vinod Kothari & Dayita Kanodia | finserv@vinodkothari.com

An industry report on a digital gold seller website estimates the FY 25 digital gold volume of 25 tons, which is a whopping Rs 30 lakh crores. While that number may be mind-boggling and may be inclusive of other forms of electronic gold (gold ETFs for example), there is no doubt that digital gold, sold on platforms from Paytm to Google Pay, to a wide variety of electronic platforms, has attracted the fancy of crores of investors. Turnover reported on the financials of some of the digital gold sellers[1] is almost 90% in FY 24-25. Looking at these volumes, one may ask – What exactly are the consumers actually buying and who is accountable for all these investments if anything goes wrong?

In this article the author discusses the current regulatory void in which digital gold is surging, and why it is so surprising that SEBI has acquired powers to regulate commodity exchanges, while a regulated digital gold scheme called Electronic Gold Receipts (EGRs) has already been launched under the aegis of that regulatory power.

The golden shine

The love that Indians have for gold doesn’t need elaboration; India is the world’s largest household gold holding country. The Morgan Stanley report that the stock of gold with Indian households may be Rs 336 lakh crores was cited all over. At the same time, the prices of gold have continued to surge.

With gold becoming increasingly unaffordable for a large section of the Indian population, many have turned to digital gold, a concept that allows individuals to invest with amounts as low as ₹100 and own a fraction of the “gold commodity.”

The three major platforms offering digital gold let you buy gold with Re 1, Rs 10 and Rs 100 – whatever infinitesimals fractions of the virtual yellow metal that you want to buy, and these sales have reached dizzy heights. One such digital gold seller reported a FY 24-25 sale of Rs 66230 crores, registering an increase of 89% over the previous year.

Current Regulatory Vacuum: 

The typical search for law about any new instrument would be – which of the existing laws cover a new-age instrument called digital gold? It would be counter-intuitive to expect that laws would always house the provisions for transactions that evolve in a dynamic world. Laws evolve much slower than situations, transactions, dealings, interests or the way people perceive or deal in value or wealth.

However, some of the potential laws would be – is it a “security” under the Securities Contracts Regulation Act? Is it a “deposit” being a financial transaction, and may come under the bar of the Banning of Unregulated Deposit Schemes Act? Given the fact that digital gold is backed, at least supposedly, by a physical gold, is it similar to trading in warehousing receipts under the Warehousing Development and Regulation Act? And so on.

The easiest to dismiss will be the Warehousing law, which was obviously intended for warehouse keeping and transferability of warehousing receipts. It was mostly intended for agricultural commodities. Some metals have also been notified by the WDRA, but gold is not one of them, and for very understandable reasons.

The content about transactions in digital gold being deposit transactions also seems easy to dismiss, at least theoretically, as the intent of a digital gold seller is not to receive money with a promise to return it. In fact, there is nothing to return, as the money has been exchanged for a right over an infinitesimal portion of gold. The digital gold seller makes a purported sale; a sale is not a deposit. The one who sells digital gold is actually selling the gold backing it. But that itself may be fallacy, because a sale requires appropriation and ascertainment of the goods, and given that the transactions in digital gold are for sizes as small as Rs 100, it is unlikely that physical gold of as much quantum would have been separated. So, if it is not appropriation or segregation of the underlying goods, then it may very well be construed as a receipt of money without the transfer of goods, and hence, deposit regulations may be brought in.

Clearly, digital gold is being traded as an investment product, and not as a device to actually take take or give delivery of the gold. Therefore, instinctively, the focus should be on the Securities Contracts (Regulation) Act (SCRA). It is bought and sold in fixed denominations of money; therefore, it also has the optical similarity with a typical financial instrument. If one sees the definition of “securities” under the SCRA, it is an inclusive definition – meaning thereby that the law does not define what a security is, but lists out what securities are covered by the law. Two points – that list itself has continued to expand over time, either because of statutory enlistment of new items, or because of the power granted to Central Govt under sec. 2 (1) (h) (iia).

In 2015, powers to regulate commodity exchanges and commodity derivative transactions were conferred on SEBI, by amending the SCRA. SEBI itself has framed a scheme for Electronic Gold Receipts, discussed below. Hence, dealing with digital gold is not alien to SEBI’s domain. In any case, the Central Govt has the power to notify digital gold as a security.

On 8th Nov., 2025, SEBI issued a press release, less than even the old text form statutory warning cigarette packets, saying that digital gold is unregulated, and investors need to be aware that investor protection mechanisms under securities market purview shall not be available for such digital gold investments. However, what is the reason for the regulators waiting and watching a ballooning market, without a definitive regulatory clarity?

This unregulated nature of digital gold was also highlighted in the case of Nishchay Babu Arkalgud vs Jar Gold Retail Private Limited, wherein the Karnataka High Court observed:

The evolution of digital gold, as a commercial concept, is not in dispute. However, the materials on record disclose that serious allegations are surfaced, including assertions that physical gold could not be traced when demanded, notwithstanding the assurances to the contrary.

Further, several customer complaints about dealings by the digital gold platform were noted as a part of the judgment, such as:

“This app has absolutely no credibility, you keep getting prompts that you’ve saved enough money to buy a gold coin, but every time just before placing order for gold coin, you get a message that gold coin is not deliverable. Also you can’t withdraw the amount you’ve saved, it only allows to withdrawal almost half of the amount. I mean, what even is the point of this application, why wouldn’t anyone just use a savings account? Lost case.”

Such comments are largely because of the unregulated nature of the product.

SEBI imposed ban for stock brokers

Earlier, digital gold was offered not only through digital payment applications but also by stock brokers registered with SEBI. However, under Rule 8(3)(f) of the Securities Contracts (Regulation) Rules, 1957 (SCRR), members of a stock exchange are prohibited from engaging in any business other than that of securities or commodity derivatives, except as a broker or agent, and only if such activity does not involve any personal financial liability.

SEBI observed that certain stock brokers were facilitating the buying and selling of digital gold for their clients, an instrument that does not qualify as a ‘security’ under the Securities Contracts (Regulation) Act, 1956 (SCRA). Consequently, through a letter dated August 3, 2021, SEBI informed stock exchanges that such activity violated Rule 8(3)(f) of the SCRR and directed members to refrain from undertaking it.

Pursuant to SEBI’s communication, the NSE issued a circular dated August 10, 2021, instructing its members to discontinue the offering of digital gold and ensure strict compliance with applicable regulations. Members who were engaged in such activities were granted one month to cease facilitating the buying and selling of digital gold on their platforms.

No for stock brokers, but no holds-barred for electronic platforms

SEBI barring its regulated securities intermediaries from dealing in or advising on digital gold did not stop the whole range of other popular public places having millions of hit every day – the e-commerce platforms, payment gateways, wallets or online payment devices. Almost all of them are aligned to some or the other digital gold seller, and permit both buying and selling of digital on or through their platforms.

RBI, has till now maintained silence on such activities, and therefore, several NBFCs have been offering digital gold on their platforms.

The rule is simple – wherever there is a footfall, there is an opportunity to make money by selling digital gold.

In a regulatory blackhole, investors continue to flock to a market where there is least oversight. There is supposedly a deposit of gold, a custodian and trustee mechanism, but nowhere do any of the rules require these custodians or the trustees to be regulated, which, in fact, they are not. In short, even if the existing major players abide by some unwritten self-assumed rules of fair game, there is no entry barrier in the business, nor are there any mechanics of clearing or settlement of trades done on the multitudes of platforms which are now freely selling such digital gold. The scenario, if the past history of unregulated instruments is any indication, is the perfect recipe for an implosion.

As a key principle, wherever someone markets an investment-based product to the public, there is a fiduciary relationship. Which means there is someone on whom investors are putting their trust. Investors can put trustin an eco-system which has regulators, supervisors, capital requirements, mechanics to ensure that the digital paper at no point is less than the real metal behind.  If neither of these are there, how can each regulator keep looking sideways for the other regulator to rise to the occasion?

Creation of a Self-Regulatory Organisation for digital gold

On December 2, 2025, the India Bullion and Jewellers Association (IBJA) announced the establishment of a self-regulatory division for the digital gold industry. This may have been influenced by SEBI’s  warnings (referred above)  to  investors that digital gold products are neither regulated as securities nor as commodity derivatives, with SEBI feigning lack of jurisdiction. 

Among others, the self-regulatory framework has proposed rules on minimum purity,  physical backing, insurance, and segregation of the underlying bullion in addition to consumer Protection rules on clear communication of risks, fees, and a defined grievance redressal mechanism.

Further, IBJA will establish a Digital Gold Transparency Portal to publicly display anonymized, aggregated compliance data and summaries of audit findings.

The final self-regulatory framework is set to be published by March 31, 2026.

The key features of an SRO, essential for its credibility, as pointed out in RBI’s Omnibus Framework for recognising Self-Regulatory Organisations (SROs) for Regulated Entities (REs), include the following: 

  • Authority & Governance: Power to set/enforce standards with strong, transparent governance.
  • Rule-making & Oversight: Clear, consultative rules and monitoring of members.
  • Conduct & Discipline: Defined codes with non-monetary penalties (e.g., reprimand, expulsion).
  • Compliance Focus: Promote adherence to Reserve Bank of India regulations.
  • Dispute Resolution: Standardized and transparent mechanisms.
  • Surveillance: Effective monitoring of members and sector.
  • Ecosystem Development: Promote best practices aligned with regulations.

. SROs are, of course, bodies consisting of the industry participants, but in order to be optically and substantively having the right to introduce code of conduct, these bodies need to have leadership that is sufficiently empowered to lay such code. It is the constitution and independence of the SRO that will render it credibility.

In any case, self regulation is not the alibi for lack of regulation – therefore, the author still strongly feels that the instrument has become far too retail-centric and far too popular for the regulators to keep shunning from action. 

Electronic Gold Receipts (EGRs)

While digital gold is currently in a state of regulatory blackhole,SEBI recognises EGRs, a scheme which was launched after a 2023 Budget announcement. Till 2024, SEBI was still  fine tuning the Master Circular, which was issued in June, 2024. This has elaborate mechanism for registered vault managers who store the physical gold against which EGRs are issued, complete with insurance, grievance redressal mechanisms, etc. All of this atypical of a regulated instrument. But given the competition EGRs face from their unleashed brother, EGRs are nowhere in the range of visibility, compared to digital gold.

Concluding Remarks

The volumes of digital gold keep rising while the instrument itself continues to stay in a state of regulatory dark spotwith some warning circulars issued by the SEBI such as the one on Nov 8. However, it lacks any regulatory clarity, any authority which can take accountability if anything goes wrong.

In this prevailing environment for digital gold, every player continues to revel and make money. The digital gold sellers are reporting PAT rises of over 200%; the GST department must be enjoying the 3% GST it charges on the trades, and each of the multiple platforms that facilitate the trades likewise make money. If gold is one of the metals that has least bid-ask spreads, then the question is – where is all this profit, for so many of the players, coming from?

[1] Some of the digital gold sellers are private companies, whose annual reports are not in public domain. Many of the numbers stated in the article are, therefore, based on the financials/other reports on the website of Augmont.