Gold Exchange in India "EMPOWER IAS"

In news:

• The Securities & Exchange Board of India (SEBI) has floated a consultation paper on the proposed framework for Gold Exchange in India.

 

Why such a move?

• According to SEBI, the proposed exchange would bring in more transparency in the gold trading market in terms of spot price discovery, quality of the gold and enable greater integration with the financial markets.

 

What is a Gold Exchange?

• As the name suggests, this would offer trading facilities in the precious metal.
• Entities like retail investors, banks, foreign portfolio investors (FPIs), jewellers and bullion dealers among others would be allowed to trade on the exchange.
• While there are existing commodity exchanges that offer trading in gold contracts, those are derivative instruments while the proposed gold exchange would allow trading akin to the spot market.
• This move assumes significance as India is the second-largest consumer of gold – after China – with an annual demand of around 800-900 tonnes.

 

Framework of Gold Exchange:

• In the first tranche, an entity desirous of delivering gold, locally manufactured or imported, on the exchange platform would have to approach a SEBI regulated vault manager and deposit physical gold meeting quality and quantity parameters with it.
• Against this, the vault manager will issue an EGR (Electronic Gold Receipt), which will be tradeable on the exchanges, in the second tranche.
• A beneficial owner will surrender the EGR to a vault manager and take delivery of the gold in the third tranche.
• A common interface will be developed between vault managers, depositories, clearing corporations and stock exchanges to enable seamless execution of the three tranches.
• The proposed denominations - reflecting underlying physical gold - of EGRs are 1 kilogram, 100 gram, 50 gram and subject to conditions, those can also be even for 5 and 10 gram.

 

What are the ways in which one can invest in gold now?

• For those wanting to buy physical gold, a visit to the neighbourhood jeweller would suffice.
• Meanwhile, there are online platforms such as Paytm, Kuvera and Indiagold among others that allow an individual to buy gold in digital form.
• The advantage of buying gold in digital form is that one can put in a very small amount as well with some platforms allowing a minimum investment of just Rs 100.
• Digital gold products have become quite popular among millennials. Then there are sovereign gold bonds issued by the government.
• One can even look at Gold ETFs or gold funds by mutual funds.
• Even gold derivative contracts traded on the exchanges have the option of physical settlement, which means investors can get physical delivery of gold.

 

How can one trade on a gold exchange?

• The SEBI has proposed an instrument called ‘Electronic Gold Receipt’, or EGR.
• The gold exchange, along with intermediaries like the vault manager and the clearing corporation, would facilitate the creation of EGR and its trading.
• So, participants can convert their physical gold into EGR, which can then be bought or sold on the exchange like any normal equity share of a listed company.
• The EGR can even be converted back into physical gold. As 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 can also be allowed for trading to increase the liquidity of the market and attract more participants.

 

Issues with gold exchange

• Since the EGRs would be traded on an exchange, Securities Transaction Tax (STT) would be levied. Also, GST would be applicable when EGRs are converted into physical gold for withdrawal.
• If in case the buyer and seller are from different states then levying state GST could be cumbersome. SEBI is mulling if only IGST or Integrated Goods and Services Tax can be levied to resolve this issue.
• As far as transactions are concerned, SEBI working groups have suggested that an entire transaction be divided into three tranches.