Capital Markets: Challenges and Developments

What are Electronic Gold Receipts?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Electronic Gold Receipts

Mains level : NA

The board of the Securities and Exchange Board of India (SEBI) has approved the framework for a gold exchange as well as for vault managers. This approval paves the way for gold exchanges to be set up for trading in ‘Electronic Gold Receipt’ (EGR).

What is EGR?

  • SEBI’s concept paper proposes issuing an electronic gold receipt in exchange pf physical gold (similar to equity shares), deposited with a vault manager (like a depositary participant) and this receipt can then be traded.
  • The government wants India’s outsized influence in the physical market for gold to be visible in the financial market for gold as well.

Why need EGRs?

  • EGI is a way of getting people to not hoard gold, by creating an exchange that provides transparent pricing and liquidity (to cash or back to gold).
  • India is a net importer of gold. We are price takers and not price setters. The whole idea is to move from being price takers to be price setters.
  • Price discovery at the exchanges will thus lead to transparency in gold pricing.
  • The gold exchanges would provide transparent price discovery, investment liquidity and assurance in the quality of gold.

What is the SEBI regulation?

  • SEBI has also proposed a regulatory framework for setting up a gold exchange.
  • Existing stock exchanges will be allowed to provide the platform for trading of EGRs.
  • The denomination for trading of EGR and conversion of EGR into gold will be decided by the stock exchange with the approval of SEBI.
  • The clearing corporation will settle the trades executed on the stock exchanges by way of transferring EGRs and funds to the buyer and seller, respectively.

How will EGR work?

  • EGR holders, at their discretion, can withdraw the underlying gold from the vaults after surrendering the EGRs.
  • SEBI-accredited vault managers will be responsible for the storage and safekeeping of gold deposits, creation of EGRs, withdrawal of gold, grievance redressal and periodic reconciliation of physical gold with the records of depository.
  • The vault manager will have a networth of at least ₹50 crore.

Back2Basics: Securities and Exchange Board of India (SEBI)

  • The SEBI is the regulatory body for securities and commodity market in India under the jurisdiction of Ministry of Finance Government of India.
  • It was established on 12 April 1988 and given Statutory Powers on 30 January 1992 through the SEBI Act, 1992.

Jurisdiction of SEBI

  • SEBI has to be responsive to the needs of three groups, which constitute the market:
  1. Issuers of securities
  2. Investors
  3. Market intermediaries

SEBI has three powers rolled into one body: quasi-legislative, quasi-judicial and quasi-executive.

  • It drafts regulations in its legislative capacity, it conducts investigation and enforcement action in its executive function and it passes rulings and orders in its judicial capacity.
  • Though this makes it very powerful, there is an appeal process to create accountability.
  • There is a Securities Appellate Tribunal which is a three-member tribunal and is currently headed by Justice Tarun Agarwala, former Chief Justice of the Meghalaya High Court.
  • A second appeal lies directly to the Supreme Court.

 

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