Spot gold trade set to take off soon on existing exchanges

Spot gold trading on existing exchanges is likely to be a reality soon following the finance minister’s announcement in the budget that the Securities and Exchange Board of India (Sebi) would be the regulatory body to monitor such trades.

This would mean that spot gold will be traded in a separate segment on existing exchanges, and vault receipts (for physical gold) provided by the Warehousing Development and Regulatory Authority (WDRA) will be traded on exchanges as securities.

A source close to the development told Moneycontrol that "the proposed trading of gold in spot may be allowed as commodity spot and commodity derivatives similar to other segments in any exchange like equity (cash) and equity derivatives.”

“In such an event, a standalone gold exchange with dominant holding of primarily stakeholders from the industry may become difficult to establish or may not be found viable,” the source added.

“Once the vaults (storing gold) come under the purview of WDRA, then in the case of gold settlement against the spot contracts, that may happen through receipts and these receipts will be treated as securities,” another source close to the development told Moneycontrol.

Currently, the WDRA has electronic negotiable warehouse receipts (eNWR) which are mandatory for delivery (settlement) of agricultural commodities on stock exchanges.

The Securities Contracts (Regulation) Act (SCRA) would also see some amendments to give shape to gold being treated as a security and in the provisions for duration of contracts.

On February 17, Nirmala Sitharaman will chair a Sebi board meeting, her first as finance minister, and may discuss issues announced in the budget including the setting up of a spot gold exchange. She may also seek timelines for their implementation.

The industry, in an earlier proposal for a standalone gold exchange, had suggested that Gold Receipts or Gold Accounts be maintained with so-called Gold Settlement Banks.

In the past few years, there have been discussions on the models that India can look at for setting up a gold exchange – have a separate regulator viz. Gold Board, or appoint Sebi as regulator.

However, “Sebi was not in favour of regulating spot exchange of gold,” another source told Moneycontrol.

Ashish Pethe, managing director of Maharashtra-based jewellery company Waman Hari Pethe, told Moneycontrol: “It is a good move by the government for traders like us. Now we get a transparent and unified price of  gold across the country.”

However, an official at a gold refining company told Moneycontrol that such a move would increase transaction costs.

“This exchange will increase the transaction cost for refiners. Who will bear it, is the question in our mind. These exchanges have to make delivery bases at various places which is not easy in a short time and that will also add to the transaction charges,” the official said.

Another market participant told Moneycontrol,“Currently, in spot market gold delivery happens on a daily basis but on exchange it will happen on T+1 or T+2 days basis. So, who will bear the cost of two days of trading and will goods and service tax be returned in a week’s time? So, Sebi and the government should think on this level also. It is a good plan, but will it take off is the question.”
India is the world’s largest importer of gold, with 800-900 tonnes of the yellow metal imported into the country every year.

If the gold spot exchange comes up, India will be the third country to have one after China and Turkey.