SEBI’s Suggested Framework for Gold Exchange

The capital market regulator, SEBI, has suggested a comprehensive framework to create a gold exchange in India. Besides the issuance of a discussion paper on the gold business, the regulator has emerged with draft norms for vault managers. So what does it mean, and how it will affect you? In this article, we will find this.

How does it Impact You?

In the near future, you would be able to transform physical gold into electronic gold receipts. Moreover, you can also invest in gold as equity shares & convert the shares back to physical gold. According to the suggested framework of SEBI, trading in gold through digital receipts creates a precise domestic spot price discovery mechanism.

What is the Meaning of Gold Exchange?

One can invest in gold as equity shares via a gold exchange. It delivers trading facilities wherein retail investors, banks, Foreign Portfolio Investors, bullion dealers, and jewellers can trade in gold through the exchange. It can create a vivacious gold system in the nation, and it is also essential considering the fact that India is the second-largest consumer of gold across the world.

How Can You Investment in a Gold Exchange?

The SEBI (Securities and Exchange Board of India) has proposed to create an instrument known as the EGR (Electronic Gold Receipt) on the bourse or gold exchange. The trading instrument is divided into three different tranches. The first tranche is where the gold (in physical form) can be converted into a digital gold receipt. Moreover, the SEBI (Securities and Exchange Board of India) has informed to create a benchmark interface among depositories, clearing corporations, vault managers and stock exchanges.

You have the digital gold receipt listed and invested on the bourse, and the bourse will obtain detailed information regarding the electronic gold receipts from the depository concerned every day in the second tranche. Such trades would be settled by the clearing corporation.

One can transform the digital gold receipts back to physical gold in the third tranche. The beneficial proprietor surrenders the digital gold receipts to the vault manager, who delivers the gold & extinguishes the digital gold receipts. Goods and Service Tax (GST) will be appropriate on the conversion of the digital gold receipts into physical gold during withdrawal.

Suggested Framework of SEBI on the Gold Exchange

After the Budget announcement, the Securities Exchange Board of India had constituted two working groups involving all stakeholders for the suggested gold exchange framework. Moreover, it has issued a consultation paper after considering the recommendations of the groups. Securities Exchange Board of India has sought comments on the opening of existing or new exchange stock bourses to be allowed to deal with the digital gold receipts.

Further, the Securities Exchange Board of India has also said that vault managers must create digital gold receipts only against the physical gold in the vaults, and electronic gold receipts of denominations of 1 kg, 100 grams & 50 grams will be available on the exchange. Trading digital gold receipts and converting digital gold receipts into physical gold shall be in the same denomination.

Securities Exchange Board of India is seeking to attract more players and especially retail investors to the suggested market. Digital gold receipts of a small denomination like 5 and 10 grams may also be allowed for trading reasons. Moreover, the Securities Exchange Board of India mentioned that the conversion from digital gold receipts to physical gold would be allowed only for beneficial owners who collect a minimum of 50 grams of physical gold in the digital form.

Another suggestion is that in the case of existing stock exchanges are allowed to deal with digital gold receipts if the contract must be launched in the new sector or allowed to be added as a fresh asset class in the present segment.

What are the Pros and Cons of Establishing a New Stock Exchange for Digital Gold Receipts?

According to the SEBI^[1], establishing a new stock exchange only for digital gold receipt has the following advantages:

1. Increased Liquidity;
2. Decreased market fragmentation;
3. Good delivery standard;
4. Single reference price.

But, SEBI (Securities & Exchange Board of India) has also accepted the fact that it has certain disadvantages or cons as well, and you can check the same below:

1. Require Fresh Investments;
2. Time-Consuming;
3. Registering new members will increase the cost of compliance and is not a feasible option for just one product.

SEBIs Additional Plan of Action

The regulator of the market has invited views of tax incentives to make the digital gold receipts market liquid for companies. Another piece of recommendation is that electronic gold receipts be made exchangeable with interoperability among the vault managers.

Securities and Exchange Board of India has appeared with regulations of the draft, consisting of registration, infrastructure necessities, and criteria for total worth, SOPs (Standard Operating Procedures), security deposit and the issuance of the digital gold receipts. Moreover, the SEBI (Securities and Exchange Board of India) has proposed maintaining records, stated code of conduct and guidelines on separation of gold and non-gold exchange businesses.

Conclusion

SEBI (Securities & Exchange Board of India) has sought public comments on essential problems of the gold exchange. It can be ended up with the proposed framework of the Securities and Exchange Board of India may aid to create a vivacious gold ecosystem in India. Moreover, you can also invest in gold as equity shares & convert the shares back to physical gold. According to the suggested framework of SEBI, trading in gold through digital receipts creates a precise domestic spot price discovery mechanism.

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