Sebi proposes framework for gold exchange; yellow metal to be traded as e-gold receipt

Sebi has constituted two working groups for drafting regulations for gold spot exchange.

Capital and commodity market regulator Securities and Exchange Board of India (Sebi) has come out with a discussion paper on setting up a gold spot exchange in the domestic market. The yellow metal will be traded as electronic gold receipts (EGRs) in the exchange, as per the proposal.

The government has announced Sebi as the sole regulator for the domestic gold spot exchange. In the budget, Finance Minister Nirmala Sitharaman had announced the plan to establish a gold spot exchange. Sebi and Warehousing Development and Regulatory Authorities would be responsible for the operations of the exchange.

With an annual gold demand of approximately 900 tonnes, India holds an important position in the global gold market. Despite being second only to China in consumption of gold, India remains a price taker, and at present, the country does not play any significant role in influencing the global price setting for the commodity.

The proposed gold exchange would infuse transparency in gold transactions and over a period of time enable India to emerge as a global price setter for the commodity.

The exchange, encompassing the entire ecosystem of trading and physical delivery of gold, is extremely necessary to create a vibrant gold ecosystem in India which is commensurate with its large share of global gold consumption, according to Sebi.

Sebi has constituted two working groups for drafting regulations for gold spot exchange. To attract more players, EGRs with smaller denominations such as 10 grams and 5 grams may also be allowed for trading purposes, the consultation paper said.

As per their recommendations, Sebi has proposed three tranches for executing transactions.

In the first tranche, physical gold would be converted to EGR. For this, a common interface between the vault managers, depositories, stock exchanges and clearing corporations has been suggested.

In the second tranche, the exchange will receive information about EGR from depositories and clearing corporations will settle these trades.

In the third and last tranche, this EGR will be converted into physical gold and buyers will get physical gold by tendering their EGR.

As per recommendations of the working group, the existing exchange can start dealing with the new product. “New exchange is good for liquidity but it takes time to start and investment is required,” Sebi discussion paper observed.

Sebi has issued draft norms for vault managers, including for registration, net worth criteria and security deposit. These vault managers will be registered as Sebi intermediaries.

The market regulator has also sought views on required tax incentives for making the EGR market liquid.