Capital Markets: Challenges and Developments

SEBI proposes framework for Gold Exchange


From UPSC perspective, the following things are important :

Prelims level: Gold Exchange

Mains level: Gold Exchange and its trading

The Securities & Exchange Board of India (SEBI) has floated a consultation paper on the proposed framework for Gold Exchange in India.

Why such a move?

  • According to SEBI, the proposed exchange would bring in more transparency in the gold trading market in terms of spot price discovery, quality of the gold and enable greater integration with the financial markets.

What is a Gold Exchange?

  • As the name suggests, this would offer trading facilities in the precious metal.
  • Entities like retail investors, banks, foreign portfolio investors (FPIs), jewellers and bullion dealers among others would be allowed to trade on the exchange.
  • While there are existing commodity exchanges that offer trading in gold contracts, those are derivative instruments while the proposed gold exchange would allow trading akin to the spot market.
  • This move assumes significance as India is the second-largest consumer of gold – after China – with an annual demand of around 800-900 tonnes.

Answer this PYQ:

Q.What is/are the purpose/purposes of the Government’s ‘Sovereign Gold Bond Scheme’ and ‘Gold Monetization Scheme’?

  1. To bring the idle gold lying with India households into the economy
  2. To promote FDI in the gold and jewellery sector
  3. To reduce India’s dependence on gold imports

Select the correct answer using the code given below

(a) 1 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) 1, 2 and 3

What are the ways in which one can invest in gold now?

  • For those wanting to buy physical gold, a visit to the neighbourhood jeweller would suffice.
  • Meanwhile, there are online platforms such as Paytm, Kuvera and Indiagold among others that allow an individual to buy gold in digital form.
  • The advantage of buying gold in digital form is that one can put in a very small amount as well with some platforms allowing a minimum investment of just Rs 100.
  • Digital gold products have become quite popular among millennials. Then there are sovereign gold bonds issued by the government.
  • One can even look at Gold ETFs or gold funds by mutual funds.
  • Even gold derivative contracts traded on the exchanges have the option of physical settlement, which means investors can get physical delivery of gold.

How can one trade on a gold exchange?

  • The SEBI has proposed an instrument called ‘Electronic Gold Receipt’, or EGR.
  • The gold exchange, along with intermediaries like the vault manager and the clearing corporation, would facilitate the creation of EGR and its trading.
  • So, participants can convert their physical gold into EGR, which can then be bought or sold on the exchange like any normal equity share of a listed company.
  • The EGR can even be converted back into physical gold. As part of the draft regulations, SEBI has proposed three denominations of EGR – one kilogram, 100 grams and 50 grams.
  • It has, however, added that EGRs of five grams or 10 grams can also be allowed for trading to increase the liquidity of the market and attract more participants.

How can one convert physical gold into EGRs?

  • An entity that intends to convert physical gold into EGR will have to go to a ‘Vault Manager’.
  • According to the proposed framework, any entity registered in India and with a net worth of at least Rs 50 crore can apply to become a vault manager.
  • After the receipt of the gold, the vault manager would create an EGR for which the depository will assign an International Securities Identification Number, or ISIN, which is a unique code to identify the specific security.
  • Once the ISIN is issued, the EGR can be traded on the gold exchange just like any other tradable security.

Can EGRs be again converted into physical gold?

  • To convert an EGR into physical gold, the owner of the EGR will have to surrender the EGR to the vault manager who will deliver the gold and extinguish the electronic receipt.
  • Considering the logistics and delivery challenges, it has been proposed that conversion of an EGR into physical gold should be allowed only if a minimum of 50 grams of gold has been accumulated in electronic form.

Issues with gold exchange

  • Since the EGRs would be traded on an exchange, Securities Transaction Tax (STT) would be levied. Also, GST would be applicable when EGRs are converted into physical gold for withdrawal.
  • If in case the buyer and seller are from different states then levying state GST could be cumbersome. SEBI is mulling if only IGST or Integrated Goods and Services Tax can be levied to resolve this issue.
  • As far as transactions are concerned, SEBI working groups have suggested that an entire transaction be divided into three tranches.

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