The Securities and Exchange Board of India (SEBI) releasing a consultation paper proposing draft regulations for exchanges that let trading in gold on the 17th of May, 2021. Its proposed an elaborate framework wherein one can convert physical gold into ‘Electronic Gold Receipts’ and even convert those back to physical gold.
What is a Gold Exchange?
As the name suggests, this course would offer trading facilities of the precious mettle. Entities like retail investors, banks, overseas portfolio investors (FPIs), jewelers, and bullion sellers amongst others could be allowed to trade at the exchange. While there are present commodity exchanges that offer to buy and selling in gold contracts, the ones are by-product units whilst the proposed gold alternate could permit buying and selling akin to the spot market. In accordance with SEBI, the proposed exchange would usher in more transparency within the gold-trading market in terms of cash price discovery, quality of the gold and enable greater integration with the financial markets.
What are the ways in which one can invest in gold now?
Currently, there are quite a few ways in which an investor can purchase gold. For the ones looking to shop for bodily gold, a go-to neighborhood jeweler might suffice. Meanwhile, there are online systems like Paytm, Kuvera, and India gold amongst others that permit a person to buy gold in virtual form. Then there are gold sovereign bonds (SGB) issued by the govt.
How can one trade on a gold exchange?
The capital marketplace regulator has proposed a device called ‘Electronic Gold Receipt’, or EGR. So, members can convert their bodily gold into EGR, which can then be bought or sold on the exchange like all normal equity shares of a listed company. As a part of the draft regulations, SEBI has proposed three denominations of EGR – one kilogram, 100 grams, and 50 grams. It has, however, added that EGRs of five grams or 10 grams also can be allowed for trading to extend the liquidity ofthe market and attract more participants.
How can one convert physical gold into EGRs?
An entity that intends to convert physical gold into EGR will need to attend a ‘Vault Manager’. As proposed, any entity registered in India and with a net worth of a minimum of Rs 50 crore can apply to become a vault manager. After the receipt of the gold, the vault supervisor could create an EGR that the depository will assign an international security number
Which may be a unique code to spot the precise security. Once the ISIN is issued, the EGR is often traded on the gold exchange a bit like the other tradable security.
Can EGRs be again converted into physical gold?
Yes. To convert an EGR into physical gold, the owner of the EGR will need to give up the EGR to the vault supervisor who will supply the gold and extinguish the digital receipt.
Will there be devoted gold exchanges or one could change EGRs on current ones like BSE, NSE, MCX, or NCDEX?
It is not clear at this stage and therefore the capital market regulator has sought public feedback on this issue. In October 2018, SEBI introduced the concept of a ‘Universal Exchange in India. Since the supply is already there, it's likely that existing bourses can launch a gold exchange also. Also, a replacement exchange would entail an additional net worth commitment and registration process, which might be time-consuming while increasing the compliance costs.
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