With an annual demand of 800-900 tonnes, India is the second-largest gold consumer worldwide. However, India’s domestic market has been facing numerous challenges like high market fragmentation, low transparency in pricing, and others.
A gold exchange in India can eliminate these issues and remove market inefficiencies.
Finance Minister Nirmala Sitharaman announced in the Union Budget of 2021 that SEBI would be given the responsibility to become the regulator of gold exchanges. Accordingly, SEBI has approved a framework to facilitate spot trading of the yellow metal in India.
As of now, India allows trading in gold futures only. With gold exchanges, India will join the league of countries like the UK, China and Turkey, which already have gold exchanges, for spot gold prices.
As per SEBI’s framework, Electronic Gold Receipt or EGR would represent gold. This EGR would come with trading, clearing as well as settlement features similar to stock or securities. This implies investors would not need to fear any possible default by traders as the transaction will be guaranteed.
These EGRs would be traded just like shares in the dematerialised form. This would lead to significant ease in trading. The government will notify EGRs as securities as per the Securities Contracts (Regulation) Act of 1956.
SEBI has decided to give the task of vault managers to various corporate entities. They would be involved with accepting gold, safeguarding it, storing it and creating EGRs. So, EGRs would represent a certain quantity of gold.
However, these vault managers have to register with SEBI and should have a minimum net worth of Rs 50 crore. SEBI announced that any of the existing or new exchanges could trade in EGRs. They can decide the denomination in which they would carry out EGR trading. However, they will require approval from SEBI. The trading denominations can be 1 gram, 2 grams, 5 grams, 10 grams and more.
The clearing corporation has to settle the trade on stock exchanges by transferring EGRs to buyers and the funds to sellers.
Moreover, EGRs will come with perpetual validity. In other words, one can hold these EGRs as long as they wish to. However, if they want to convert these into gold, they have to surrender EGRs to their vault managers.
Notably, to reduce transaction costs, these EGRs will be ‘fungible’ in nature. This means holders would be able to convert an EGR issued by a particular vault manager with another manager.
Vault managers will also have to maintain documents detailing gold transfer, withdrawal and storage. They should have documentation of the purity of the deposited gold as well. As per SEBI’s guidelines, they have to maintain all records for a minimum of five years.
SEBI has laid down the process that one should follow for depositing gold in order to obtain EGRs. Anyone who wishes to create an EGR has to first place a request to deposit gold with a vault manager. The manager will check the quality to ensure compliance with the standards, weigh the gold, verify necessary documents and accept deposits.
Once deposited, the vault manager will then create an EGR in the name of the depositor as the beneficial owner.
Experts state that gold prices usually remain on the higher side as it follows the prices of the London Bullion Market. The gold exchanges will provide India with the authority to set its own gold prices. It could lead to lower gold prices or India spot gold price discovery.
Interestingly, the gold exchanges will eliminate different prices existing in different parts of the country. The difference in gold prices within the country is often unfair for customers. While the customs duty and GST rates are uniform throughout all regions, a different price for the same quality of gold is indeed unfair.
Gold exchanges will have a positive impact on the domestic gold market and consumers. However, the government should also focus on reducing illegal jewellery manufacturing and gold smuggling to fulfil the objectives of gold exchanges.