On May 17, 2021, the Securities and Exchange Board of India(SEBI) issued a Consultation Paper detailing the Proposed framework for the Gold Exchange in India and the draft SEBI (Vault Managers) Regulations, 2021 for regulating the gold exchange-related business of the Vault Managers.
- The Gold Exchange instruments are termed as “Electronic Gold Receipt” (EGR)
- With annual gold demand of ~800-900 tonne, India is the 2nd largest consumer of gold globally. (First – China)
- Objective: Gold exchange(EGR) is intended to ‘one nation one price’ of gold
In the budget of FY22 Finance Minister, Nirmala Sitharaman, announced SEBI as the regulator for the gold exchange of India. As per the announcement, SEBI was made as the regulator of the entire ecosystem of the proposed gold exchange including vaulting, assaying and gold quality and delivery standards.
i.What is Gold Exchange?
Gold Exchange includes the entire ecosystem of trading and physical delivery of gold, and it would lead to transparent domestic spot price discovery, assurance in the quality of gold, and increase gold recycling in India.
SEBI constituted two working groups (involving stakeholders) to implement the gold exchange framework.
- The first working group was set to recommend a suitable framework for trading gold on the exchange platform and settlement by Clearing Corporation(CC).
- The Second Working Group was set to understand the Gold ecosystem in India and suggest measures for setting up the Gold Exchange including Regulations for Vault Managers.
iii.What is Bullion Market?
A bullion market is a place where exchanges of gold and silver take place. It transacts gold and silver at market spot prices. (The London Bullion Market is the primary bullion market for global trading).
Recommendations of the Working group:
i.The entire transaction in the Gold Exchange is divided into 3 tranches as follows:
- First Tranche: Conversion from Physical Gold to EGR (Suggested an interface between the vault managers, depositories, stock exchanges and CC)
- Second Tranche: Trading of EGR in stock exchange/s (depositories (that hold EGRs in Demat), stock exchanges, and CC will clear the trade)
- Third Tranche: Conversion from EGR to Physical Gold (The beneficial owner will have to surrender the EGR to obtain the physical gold)
Note – Like shares, EGRs will be held in Demat form and can be converted into physical gold when needed.
ii.Under Universal Exchange, the existing stock exchanges may be allowed to deal in EGR either through a separate segment or as a new asset class in the existing segment.
- In October 2018, SEBI allowed “Universal Exchange” wherein stock exchanges were allowed to deal in both equities and commodities.
iii.Product denomination for trading and conversion of EGR into physical gold:
- EGR of 1 kg, 100 grams and 50 grams denomination may be available with the stock exchange/s.
- Trading: The EGRs of 1 kilogram, 100 grams and 50 grams denomination should be available for trading of EGR and conversion of EGR into physical gold and smaller denominations(SD) such as 10 grams and 5 grams may also be allowed for trading.
- Conversion of SD of EGRs into physical gold, will be permitted only when the beneficial owner has at least 50 grams (or multiples thereof) of physical gold in the form of EGRs.
iv.Suggested to make EGR fungible with interoperability between vault managers.
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About Securities and Exchange Board of India (SEBI):
Establishment – On April 12, 1992, in accordance with the Securities and Exchange Board of India Act, 1992.
Headquarters – Mumbai, Maharashtra
Chairman – Ajay Tyagi