Gold Exchange in India: SEBI's EGR Framework

Gold Exchange in India: SEBI's EGR Framework



Unlocking Gold Exchanges in India: A Comprehensive Guide

India, with its insatiable appetite for gold, stands as the second-largest consumer of the precious metal globally, demanding 800-900 tonnes annually. Despite this, the domestic gold market faces challenges like market fragmentation and pricing opacity. The introduction of gold exchanges in India aims to address these issues, fostering transparency and efficiency.

SEBI's Framework for Gold Exchanges

In a significant move, Finance Minister Nirmala Sitharaman, during the 2021 Union Budget, entrusted SEBI with the role of regulating gold exchanges. SEBI has since approved a framework facilitating spot trading of gold in India. This marks a departure from the existing scenario where only gold futures are traded.

This development aligns India with countries like the UK, China, and Turkey, which already boast gold exchanges for spot prices.

Functioning of Gold Exchanges

As outlined by SEBI, the backbone of gold exchanges will be Electronic Gold Receipts (EGR). These EGRs represent gold and function similarly to stocks or securities, offering trading, clearing, and settlement features. Notably, the introduction of EGRs ensures guaranteed transactions, minimizing the risk of default by traders.

EGRs will be traded in dematerialized form, similar to shares, simplifying the trading process. The government will categorize EGRs as securities under the Securities Contracts (Regulation) Act of 1956.

Creation and Trading of EGRs

Vault managers, entrusted with accepting, safeguarding, and storing gold, will play a pivotal role in creating EGRs. SEBI mandates that these vault managers register with a minimum net worth of Rs. 50 crore. Existing or new exchanges can trade in EGRs, deciding on trading denominations with SEBI's approval.

Trading denominations may include 1 gram, 2 grams, 5 grams, 10 grams, and more. The clearing corporation settles trades on stock exchanges by transferring EGRs to buyers and funds to sellers. EGRs have perpetual validity, allowing holders to retain them indefinitely. However, to convert EGRs into physical gold, surrendering them to vault managers is necessary.

Depositing Gold with Vault Managers

SEBI outlines a meticulous process for depositing gold to obtain EGRs. Individuals interested in creating an EGR must initiate a request to deposit gold with a vault manager. The manager conducts quality checks, verifies documents, and accepts deposits. Upon deposit, an EGR is created in the depositor's name, designating them as the beneficial owner.

Significance of Gold Exchanges

Gold prices in India often mirror those of the London Bullion Market, resulting in higher prices. Gold exchanges empower India to establish its gold prices, potentially leading to lower rates or enhanced spot gold price discovery. Importantly, gold exchanges eliminate disparate pricing across regions, ensuring uniformity and fairness for consumers.

Conclusion:

A Positive Shift in the Gold Market

Gold exchanges herald a positive transformation in the domestic gold market, promising transparency and efficiency. While they empower India to set its gold prices, a parallel focus on curbing illegal activities like jewelry manufacturing and gold smuggling will be imperative for realizing the full potential of gold exchanges. As India ventures into this new era of gold trading, the landscape holds promises of fair pricing and enhanced consumer benefits.



Unlocking Gold Exchanges in India: A Comprehensive Guide

India, with its insatiable appetite for gold, stands as the second-largest consumer of the precious metal globally, demanding 800-900 tonnes annually. Despite this, the domestic gold market faces challenges like market fragmentation and pricing opacity. The introduction of gold exchanges in India aims to address these issues, fostering transparency and efficiency.

SEBI's Framework for Gold Exchanges

In a significant move, Finance Minister Nirmala Sitharaman, during the 2021 Union Budget, entrusted SEBI with the role of regulating gold exchanges. SEBI has since approved a framework facilitating spot trading of gold in India. This marks a departure from the existing scenario where only gold futures are traded.

This development aligns India with countries like the UK, China, and Turkey, which already boast gold exchanges for spot prices.

Functioning of Gold Exchanges

As outlined by SEBI, the backbone of gold exchanges will be Electronic Gold Receipts (EGR). These EGRs represent gold and function similarly to stocks or securities, offering trading, clearing, and settlement features. Notably, the introduction of EGRs ensures guaranteed transactions, minimizing the risk of default by traders.

EGRs will be traded in dematerialized form, similar to shares, simplifying the trading process. The government will categorize EGRs as securities under the Securities Contracts (Regulation) Act of 1956.

Creation and Trading of EGRs

Vault managers, entrusted with accepting, safeguarding, and storing gold, will play a pivotal role in creating EGRs. SEBI mandates that these vault managers register with a minimum net worth of Rs. 50 crore. Existing or new exchanges can trade in EGRs, deciding on trading denominations with SEBI's approval.

Trading denominations may include 1 gram, 2 grams, 5 grams, 10 grams, and more. The clearing corporation settles trades on stock exchanges by transferring EGRs to buyers and funds to sellers. EGRs have perpetual validity, allowing holders to retain them indefinitely. However, to convert EGRs into physical gold, surrendering them to vault managers is necessary.

Depositing Gold with Vault Managers

SEBI outlines a meticulous process for depositing gold to obtain EGRs. Individuals interested in creating an EGR must initiate a request to deposit gold with a vault manager. The manager conducts quality checks, verifies documents, and accepts deposits. Upon deposit, an EGR is created in the depositor's name, designating them as the beneficial owner.

Significance of Gold Exchanges

Gold prices in India often mirror those of the London Bullion Market, resulting in higher prices. Gold exchanges empower India to establish its gold prices, potentially leading to lower rates or enhanced spot gold price discovery. Importantly, gold exchanges eliminate disparate pricing across regions, ensuring uniformity and fairness for consumers.

Conclusion:

A Positive Shift in the Gold Market

Gold exchanges herald a positive transformation in the domestic gold market, promising transparency and efficiency. While they empower India to set its gold prices, a parallel focus on curbing illegal activities like jewelry manufacturing and gold smuggling will be imperative for realizing the full potential of gold exchanges. As India ventures into this new era of gold trading, the landscape holds promises of fair pricing and enhanced consumer benefits.

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