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SEBI approves framework for gold exchange, here’s how it will work

This much anticipated move comes after Finance Minister Nirmala Sitharaman announced SEBI as the regulator for spot gold exchanges in the budget.

September 28, 2021 / 06:56 PM IST
Sebi | PC-Shutterstock

Sebi | PC-Shutterstock

The board of the Securities and Exchange Board of India (SEBI) has approved the framework for spot trading of gold in India.

Currently, India allows trading only in gold futures, unlike China and several other countries which have spot exchanges.

This much anticipated move comes after Finance Minister Nirmala Sitharaman announced SEBI as the regulator for spot gold exchanges in the budget.

ALSO READ: SEBI approves framework for Gold Exchange, creation of Social Stock Exchange

How will spot gold trading work?

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SEBI has proposed that instruments representing gold called “Electronic Gold Receipts” (EGR) be notified as securities.

That means they will have the trading, clearing and settlement features like any other security instruments traded on exchanges. EGRs will be notified as securities under the Securities Contracts (Regulation) Act 1956.

Who can create these EGRs?

Enter corporate entities called vault managers. These vault managers must be registered with SEBI and have a net worth of Rs 50 crore. They are instrumental in accepting gold deposits, safekeeping and storage of gold and creating these EGRs. Thus EGRs represent a certain underlying quantity of gold.

SEBI has said any exchange, existing as well as new, can launch trading in EGRs in a separate segment. They can also decide the denomination for trading o f EGR (say, 1 gm, 2 gm, 10 gm etc) with the approval of SEBI.The clearing corporation will settle the trade executed on the stock exchanges by way of transferring EGRs and funds to the buyer and seller respectively.

Further SEBI said the EGR holder can hold the EGR as long as intended, since they will have perpetual validity. In case, the EGR holder wants to convert it into the underlying gold, they can do so by surrending the instrument with a vault manager.

To cut transaction costs, SEBI has made these EGRs ‘fungible’. In other words, holders can convert the EGRs issued by a vault manager with any other vault manager.

Industry experts welcomed the move saying it would add transparency and safety to gold transactions.

"You will have certified pure material. Apart from purity, payment too will be guaranteed," said Surendra Mehta, national secretary of Indian Bullion and Jewellers Association.

All India Gem & Jewellery Domestic Council (GJC) chairman Ashis Pethe said the step will unify the trade by eliminating regional price differences. At present, various states have different gold prices. "The gold exchange will bring a single market in the country with a uniform price," he said.

It will also add to options for investors. Currently, people can invest in gold ETFs, trade in gold futures and buy the sovereign gold bond which offers an interest of 2.5 percent.

While sovereign bonds offer interest, they have low liquidity which could work in favour of the gold exchange, said Geojit Financial Services MD C J George. "There could be a custody fee for the gold in the exchange which may be announced later," he said.

Mehta said trading in 1 gm, 5 gms or 10 gms can attract more consumers to the exchange. However, he said, it is unlikely that India can set the price of gold.  "Price discovery can happen only if there is a two-way trade. But India only imports gold and don’t export it," he clarified.

India is the second largest consumer of gold after China with average annual demand around 700 to 800 tonnes. In 2020 in the aftermath of Covid-19, the gold demand fell to a 25 year low at 446 tonnes as per World Gold Council report.

"The gold spot exchange will be good for the investors if they can encash electronic gold receipts easily. It is yet to be known how long it will take for the consumer to get the money," said Dr B Govindan, chairman of Bhima Jewellers.

Govindan, who is also the southern regional chairman of All India Gem & Jewellery Domestic Council (GJC) said it may not be immediately possible to set a uniform gold rate for the entire country as the cost of operation is higher in the northern states. "`In South India we are already setting a fixed price for gold everyday for all the states," Govindan said.
PK Krishnakumar is a journalist based in Kochi.

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