Unlocking Gold Exchanges in India: A Comprehensive Overview

As the world's second-largest consumer of gold, India shows an annual demand of 800-900 tonnes. However, the local gold market is challenged by issues such as fragmentation and lack of pricing clarity. The establishment of gold exchanges in India seeks to enhance market transparency and efficiency.

SEBI's Framework for Gold Exchanges

Finance Minister Nirmala Sitharaman assigned SEBI, disclosed in the 2021 Union Budget, the responsibility to regulate gold exchanges. SEBI's approved framework now facilitates spot gold trading, moving away from previously exclusive gold futures trading.

This initiative positions India alongside nations like the UK, China, and Turkey, which have operational gold exchanges for spot trading.

How Gold Exchanges Function

According to SEBI, Electronic Gold Receipts (EGRs) will be central to gold exchanges, acting like stocks or securities with features such as trading, clearing, and settlement. EGRs provide transaction guarantees, reducing default risks.

EGRs will be dematerialized, akin to shares, thus streamlining the trading process. They will be classified as securities under the Securities Contracts (Regulation) Act of 1956.

Creation and Trading of EGRs

Vault managers, key to accepting and storing gold, will generate EGRs. SEBI requires them to register with a minimum net worth of Rs. 50 crore. Existing or new exchanges may trade EGRs after securing SEBI approval for trade denominations.

Possible trade denominations include 1 gram, 2 grams, 5 grams, and 10 grams. In settlement, EGRs shift to buyers, and funds transfer to sellers via the clearing corporation. EGRs hold perpetual validity unless converted into physical gold, which necessitates surrendering to vault managers.

Depositing Gold with Vault Managers

SEBI's process for obtaining EGRs requires depositing gold with a vault manager. A depositor must request gold deposit, undergo quality checks, document verification, and upon approval, an EGR is issued, naming them the beneficial owner.

Importance of Gold Exchanges

India's gold prices often echo the London Bullion Market rates, leading to higher premiums. Gold exchanges aim to set national gold prices, potentially lowering rates and ensuring fair pricing. Eliminating regional price variations, these exchanges promise uniformity for consumers.

Conclusion: A Positive Shift in Gold Market Dynamics

Gold exchanges signal a promising evolution in India's gold market, promoting transparency and efficiency. While they can help establish domestic pricing, efforts to curb illegal activities such as jewelry manufacturing and smuggling are crucial for maximizing their potential. As India transitions into this new gold trading era, the outlook is set for fair pricing and consumer advantages.