Earlier in May’21, the SEBI had proposed a comprehensive gold- exchange framework. The proposal suggests a system wherein an investor can convert physical gold assets into “Electronic Gold Receipts” (EGR), and trade them in a similar manner like shares, and interestingly the investor can convert these e-gold receipts back into physical gold.
The proposed gold exchange will include an entire ecosystem of physical delivery and trading. According to SEBI, this new ecosystem is necessary to match the growing demand for gold in India. Currently, despite the high consumption value, India does not play a significant role in influencing the gold price setting for the commodity. Over a period of time with this new transparent model, India can soon emerge as a global price setter.
Even though this framework is merely a proposal and not a regulation yet, there is a lot that can happen while all the details are furnished. This piece highlights the crucial aspects of this new proposal by SEBI to create a gold exchange market.
Key Points in the Consultation Paper–
What are the ways of making a gold investment now?
Currently, there are multiple ways that an investor can buy gold.
The most popular way to buy gold is in the form of jewelry by a trusted and certified jeweler, apart from buying physical gold. A new and more efficient way is to buy gold in the form of ETFs or mutual funds (FoFs) and via Sovereign Gold Bonds (SGBs). This is predominantly a passive mode of investment into gold.
The digital form of gold is also gaining traction given the minimum investment requirements
(Team Tavaga only recommends investments into gold via ETF, FoF and SGBs. We believe the negatives outweigh the benefits when it comes to digital gold).
Traders having a short term view of the commodity prefer trading in gold via derivative contracts.
What is the novel gold exchange trade platform?
The main motive behind setting up a new spot gold exchange is to ensure a single efficient delivery standard, reduce market fragmentation and improve liquidity.
A gold exchange platform would offer trading facilities. Various market players like Foreign Portfolio Investors, Jewellers, Banks, Retail Investors, Bullion Dealers would be allowed to freely trade on the exchange.
SEBI as mentioned above has proposed a new instrument called, “Electronic Gold Receipt” or “EGR”. The regulator has highlighted that the exchange along with intermediaries like the vault manager and clearing corporation would facilitate the creation of the EGRs. The participants of the exchange can convert their physical gold asset into EGRs that could be further bought and sold like any other equity share. Interestingly, the EGR can also be converted into physical gold. The market regulator in the regulation has proposed three denominations of the EGR – one kilogram, 100 grams and 50 grams.
How can you convert gold into EGR?
Any entity that intends to convert its physical assets into EGR will have to contact a “Vault Manager”. As per the proposed guidelines, any entity registered in India with a net worth of at least Rs.50crs can put in an application for registering as a vault manager. On receipt of the physical asset, the vault manager is able to create an EGR, which will be marked with an International Securities Identification Number or ISIN. An ISIN is a unique code to identify a specific country. Once an ISIN is issued the EGR can be easily traded like any other tradable instruments.
How can you convert EGR into physical gold?
The reconversion of the EGR is hassle-free. All the owner of the EGR has to do is bring it to the vault manager. The manager will deliver the physical gold and stamp out the electronic receipt.
To maintain the logistics and delivery of the EGR and the conversion, there is a proposed minimum receipt of 50 grams of EGR.
How is Gold EGR different from Gold ETF and Futures?
EGRs, ETFs and Gold Futures are very different instruments. Gold Futures are used by investors for hedging purposes while ETFs are an ideal investment to broaden the portfolio and to get exposure to various sectors like gold mining, manufacturing, industry etc. This new EGR framework does not intend to replace or substitute the existing instruments, it is meant as a compliment for current products like ETFs, futures, digital gold and likes.
Overall, this is a very promising and positive development towards making India a global gold price influencer. According to reports, this development was in talks for a while, but SEBI has opened the proposal for further public feedback. However, the regulation is comprehensive and has addressed the major market concerns, including taxes, reconversion and denominations.