The Government of India designated the Securities and Exchange Board of India (“SEBI”) as the regulator for gold exchanges in India through the Union Budget 2021-22. SEBI issued a consultation document on May 17, 2021, in response to this notification and in support of the government's desire to create regulated gold exchanges in the country.
India is the world's second-largest gold consumer, with annual gold consumption of over 800-900 tonnes. The Indian gold market, on the other hand, is currently characterized by a considerable degree of fragmentation. In addition, there is a lack of quality assurance and price transparency. The World Gold Council proposes the creation of a gold spot exchange to address these issues. An integrated, uniform, and transparent gold trading mechanism will assist India in realizing the potential of its gold market in driving the economy to higher levels of growth.
As a result, SEBI has highlighted the development of a thriving gold ecosystem in India, which includes both trading and physical delivery of the metal. SEBI proposes a system to promote gold trade on a Gold Exchange in the form of electronic gold receipts ("EGR") in its paper.
Table of Content
Framework of Gold Exchange (How It Will Work?)
How will Gold Spot Trading Work?
SEBI has proposed that “Electronic Gold Receipts” (EGR), which are gold-based products, be notified as securities. That implies they'll have the same trading, clearing, and settlement capabilities as other securities traded on exchanges. Under the Securities Contracts (Regulation) Act 1956, EGRs will be notified as securities.
Creation of EGRs
Vault managers are corporate companies that handle vaults. These vault managers must be SEBI-registered and have a net worth of at least Rs 50 million. They play a key role in the acceptance of gold deposits, safeguarding and storage of gold, and the creation of EGRs. As a result, EGRs symbolize a certain amount of gold.
SEBI has stated that any exchange, old or new, can start trading in EGRs in a distinct sector. With SEBI's consent, they can also determine on the denomination for trading EGR (for example, 1 gm, 2 gm, 10 gm, etc.). The clearing corporation will settle stock exchange transactions by transferring EGRs and money to the buyer and seller, respectively.
SEBI also stated that the EGR holder can keep the EGR as long as they want because they are perpetually valid. If an EGR holder wishes to convert it to the underlying gold, they must surrender the instrument to a vault manager. SEBI has made these EGRs fungible in order to reduce transaction costs. In other words, holders of EGRs issued by one vault manager can convert them to EGRs issued by any other vault manager. Industry analysts applauded the decision, claiming it will improve gold transactions' transparency and security.
SEBI as the Regulator
It is critical to gain the trust of both ordinary investors and institutions in order for the projected electronic gold market to grow. The nomination of SEBI as the Gold Exchange's regulator will ensure market integrity and stability, attracting investors to trade in EGRs. SEBI has operated with the principle of protecting investors' interests in the securities market from its inception, as stated in the Preamble to the SEBI Act, 1992.
Conclusion
By establishing a national regulated gold market in India, the proposed framework will revolutionize gold trade. The Gold Exchange and EGRs, with their consistent trading procedures and sound SEBI regulations, may in fact create a simpler, safer, and regulated path for gold investing.
Happy Investing!
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