Recently, a significant development has been taking place in India’s finance sector. The Securities and Exchange Board of India (SEBI), a statutory body established under the Securities and Exchange Board of India Act in April 1992, has proposed a framework for setting up a spot gold exchange. This spot exchange is a trading platform where financial commodities such as currencies, securities, and particularly gold in this context, are traded for immediate delivery.
Proposed Framework of Gold Exchange
SEBI’s blueprint for the gold exchange operates in three tranches. In the initial phase, an entity interested in delivering gold, whether locally produced or imported, would approach a SEBI-regulated vault manager. Their role will be to deposit physical gold that adheres to specific quality and quantity criteria. As a response, the vault manager issues an Electronic Gold Receipt (EGR), which subsequently becomes tradable on the exchanges in the second tranche.
In the third and final tranche, the beneficial owner can surrender the EGR to a vault manager and take gold delivery. A common interface is intended to be developed between vault managers, depositories, clearing corporations, and stock exchanges, aiming to ensure seamless execution of all three tranches.
The EGR denominations, which represent the underlying physical gold, are proposed to be 1 kilogram, 100 gram, 50 gram. Under certain criteria, these could potentially be reduced to amounts as small as 5 and 10 grams. The Security Transaction Tax (STT) is set to be levied upon the trading of the EGR, with the Integrated Goods and Services Tax (IGST) applied at the time of delivery.
Further Issues Raised by SEBI
SEBI has also introduced considerations regarding fungibility and interoperability between vault managers. Fungibility means gold deposited under one EGR can be delivered against the surrender of another EGR that meets the same contract specifications. On the other hand, interoperability refers to the feasibility of depositing gold at one location with a specific vault manager and withdrawing it from a different location from the same or different vault manager. The physical gold’s availability is a prerequisite in this case. This provision could significantly cut costs for buyers.
Rationale for Establishing a Separate Gold Exchange
The purpose behind creating a separate exchange for gold is to foster a dynamic gold ecosystem in India that aligns with its substantial global gold consumption share. India trails only China as the world’s largest consumer of gold, with an annual gold demand ranging roughly between 800-900 tonnes. This prominent position gives India significant leverage in worldwide markets.
A primary goal of setting up gold exchanges, as is the case with the proposed spot gold exchange, is for India to transition from being a price taker to a price setter. Furthermore, this move aims at establishing an India good delivery standard similar to the London Bullion Market Association (LBMA) accredited gold bars. With advantages such as a unified good delivery standard, reduced market fragmentation, enhanced liquidity, and a single reference price, establishing a new stock spot gold exchange presents numerous benefits.
References: TH
Last Modified: February 13, 2024