SEBI’s Proposed Framework for Gold Exchange

Ashish M. Shaji

26 May, 2021

The capital market regulator, SEBI, has proposed a detailed framework to create a gold exchange in India. Apart from issuance of a consultation paper on the gold exchange, the regulator has come out with draft norms for vault managers. So what does it mean, and how will it impact you. We will find out by the end of this article.

What does it mean for you?

Very soon, you would be able to convert physical gold into electronic gold receipts. Further, you can also trade in gold as equity shares and convert the shares back to physical gold. As per SEBI’s proposed framework, trading in gold via electronic receipts creates a transparent domestic spot price discovery mechanism.

Meaning of Gold Exchange

One can trade in gold as equity shares through a gold exchange. It provides trading facilities wherein banks, retail investors, foreign portfolio investors, bullion dealers, and jewellers can trade in gold via the exchange. It can create a vibrant gold ecosystem in the country, and it is also vital considering the fact that India is the second largest consumer of gold across the globe.  

How can you trade on a gold exchange?

The Securities and Exchange Board of India has proposed to create an instrument known as the Electronic Gold^[1] Receipt or EGR on the bourse or gold exchange.

The trading mechanism is divided into three tranches. The first tranche is where physical gold can be converted into an electronic gold receipt. Further, SEBI has advised to create a standard interface among depositories, vault managers, clearing corporations and stock exchanges.

You have the electronic gold receipt listed and traded on the bourse, and the bourse shall obtain elaborate information about the electronic gold receipt from the depository concerned daily in the 2^nd tranche. These trades would be settled by the clearing corporation.

One can convert the electronic gold receipts back to physical gold in the 3^rd tranche. The beneficial owner surrenders the electronic gold receipts to the vault manager, who delivers the gold and extinguishes the electronic gold receipts. GST will be applicable on the conversion of the electronic gold receipts into physical gold during withdrawal.

Proposed Framework of SEBI on the Gold Exchange

After the announcement of the Budget, SEBI had constituted two working groups involving all stakeholders for the proposed gold exchange framework. Further, it has issued a consultation paper after considering the recommendations of the groups. SEBI has sought comments on opening of new exchange or existing stock bourses be permitted to deal with the electronic gold receipts.

Moreover, SEBI has also said that vault managers should create electronic gold receipts only against the physical gold in the vaults, and electronic gold receipts of denomination of 1 kg, 100 grams and 50 grams shall be available on the exchange. Trading of electronic gold receipts and conversion of electronic gold receipts into physical gold shall be in the same denomination.

SEBI is seeking to attract more players and especially retail investors to the proposed market. Electronic gold receipts of a small denomination like 5 and 10 grams may also be permitted for trading purposes. Further, SEBI stated that the conversion from electronic gold receipts to the physical gold shall be permitted only for beneficial owners who accumulate minimum of 50 grams of physical gold in the electronic form.

Another proposal is that in case existing stock exchanges are permitted to deal with electronic gold receipts, if the contract should be launched in the new segment or permitted to be added as new asset class in the existing segment.

Pros and cons of setting up a new stock exchange for electronic gold receipts

As per SEBI, setting up of new stock exchange only for electronic gold receipts has the following benefits:

• Reduced market fragmentation;
• Enhanced liquidity;
• Single reference price;
• Good delivery standard.

However, SEBI has also accepted the fact that it has certain cons or disadvantages as well. They include:

• Time consuming;
• Require fresh investments;
• Registering fresh members will increase compliance costs and is not a viable option for just one product.

SEBIs further plan of action

The market regulator has invited views on tax incentives to make the electronic gold receipts market liquid for entities. Another piece of advice is that electronic gold receipts be made fungible with interoperability among the vault managers.

SEBI has come out with draft regulations, including registration, infrastructure requirements, criteria for net worth, security deposit, SOPs and the issuance of the electronic gold receipts.  Further, SEBI has suggested on maintaining records, specified code of conducts and guidelines on segregation of non-gold and gold exchange businesses.

Conclusion

SEBI has sought public comments on vital issues of the gold exchange. It can be concluded that SEBI’s proposed framework may help to create a vibrant gold ecosystem in India.

Read our article: All about SEBI reviews Norms of Investment