SEBI Proposes Framework for Gold Exchange

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SEBI Proposes Framework for Gold Exchange

SEBI has announced a consultation paper on proposed framework for Gold Exchange in India.

Background

In the budget 2018-19, Government had announced to establish a regulated gold exchange in India. After the budget announcement, SEBI was notified to act as the regulator for the formation of gold exchange in the country. 

Why there is a need for Gold exchange in India?

India has an annual gold demand of approximately 800-900 tonnes, being second in global consumption of gold. Despite this, India has remained only as a price taker and does not play any significant role in influencing the global price-setting for the commodity.

It is expected that the proposed Gold Exchange would inculcate transparency in gold transactions and enable the country to emerge as a global price setter for the commodity over a period of time.

As per SEBI, The proposed Gold Exchange, encompassing the entire ecosystem of trading and physical delivery of gold, is extremely necessary to create a vibrant gold ecosystem in India which is commensurate with India’s large share of global gold consumption.

Check out the upcoming Sovereign Gold Bond Schemes here (SGB 2021-22 Scheme)

What are the benefits of Gold Exchange?

The proposed gold exchange would encompass the entire trading and physical delivery of gold which shall lead to the following benefits:

  • Lead to efficient and transparent domestic spot price discovery.
  • Assurance in the quality of gold.
  • Promotion of good delivery standard in India with active retail participation.
  • Greater integration with financial markets.
  • Augment greater gold recycling in the country.

How will the trading be done in the gold exchange?

The entire transaction in the gold exchange would be divided into three tranches. The underlying instrument would be termed as Electronic Gold Receipt (EGR). The transaction would flow in the following sequence:

First tranche Conversion of physical gold into EGR. A common interface is suggested to be developed between the vault managers, depositories, stock exchanges and clearing corporations. Physical gold converted into EGR shall be reflected in the demat account of the depositor maintained with the Depository Participant.

Second trancheTrading of EGR on stock exchange. On receipt of information pertaining to EGR, from the depository, the stock exchanges would list the EGR and allow trading.

Third trancheConversion of EGR to physical gold. Those owners who want to receive physical gold against their EGRs would have to surrender the EGRs and obtain physical gold.

What will be the product denomination of EGR?

EGR of 1 kg, 100 grams and 50 grams denomination may be available with the stock exchange/s with same denomination for trading and conversion of EGR into physical gold. In order to attract more players to this market, EGR with smaller denominations such as 10 grams and 5 grams may also be allowed, for trading purposes. However conversion of small denominations of EGR would be allowed only when at least 50 grams of EGR have been accumulated.

What are the key points on which SEBI has invited public feedback?

Taxation

Securities Transaction Tax would be applicable as they are traded on an exchange just like any other securities. GST would also be levied when EGRs are converted into physical gold. However there could be an issue when buyer and seller are from different states as levying SGST would be difficult. SEBI is considering whether only IGST should be applied at the time of withdrawal.

SEBI has invited suggestions on the kind of tax structure that should be applied.

Levy and collection of storage and delivery charges

The storage charges levied by the vault managers shall be levied on the owner of the EGRs and they would be collected by the respective depositories. SEBI has sought suggestions on any better mechanism to levy and collect storage, delivery charges and validity of EGRs in terms of tenure.

“Vault Manager” means any person who intends to carry on the business of providing vaulting services;

 “vaulting service” in relation to gold means the storage and safekeeping of gold deposited with the vault manager by the depositor for the purpose of trading in electronic gold receipt and providing services incidental thereto.

Vault Manager should be a body corporate incorporated in India and has a minimum net worth of Rs 50 crore.

Comments may be sent by email to goldex@sebi.gov.in on or before June 18, 2021.

Please note that these guidelines are not final and might change until the framework guidelines for the proposed exchange are finalized.

 

 


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About CA Priyanka Choudhary Jain 79 Articles
Chartered Accountant & an experienced credit analyst. She has worked with CRISIL as a Senior Credit Analyst on rating assignments including business & financial analysis in Corporates as well as the Public Finance Sector. Please mail your queries, feedback, and any suggestions to her on info.financepost@gmail.com

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