Markets regulator SEBI on Monday proposed an elaborate framework for setting up a gold exchange wherein the yellow metal will be traded in the form of electronic gold receipts and will help in having a transparent domestic spot price discovery mechanism.

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Also, the proposed denominations -- reflecting underlying physical gold -- of Electronic Gold Receipts (EGRs) are 1 kilogram, 100 grams, 50 grams and subject to conditions, those can also be even for 5 and 10 grams.

Apart from issuing a consultation paper on the gold exchange, the watchdog has come out with draft norms for vault managers and they will be registered as a SEBI intermediaries.

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 its large share of global gold consumption, according to SEBI.

Presenting the Budget for 2021-22, Finance Minister Nirmala Sitharaman had said that SEBI will be the regulator for gold exchange and Warehousing Development and Regulatory Authority (WDRA) will be strengthened to set up the commodity market ecosystem.

As per SEBI, the proposed gold exchange would lead to efficient and transparent domestic spot price discovery, assurance in the quality of gold, promotion of India good delivery standard with active retail participation, greater integration with financial markets and augment gold recycling in the country.

"Establishment of regulated gold exchange is a landmark measure and to give due prominence to the historic step, it is believed that the terminology for the instrument should be unique and one that carries a global resonance," SEBI noted.

The regulator has suggested that the instrument to be traded on the bourse can be termed as an 'Electronic Gold Receipt' (EGR) and that the entire transaction mechanism can be divided into three tranches.

In the first tranche, physical gold would be converted to EGR. In this regard, a common interface between the vault managers, depositories, stock exchanges and clearing corporations has been suggested.

The EGR will be listed for trading and the bourse will receive information pertaining to the EGR on a daily basis from the depository concerned in the second tranche. The clearing corporation will settle the trades, as per the consultation paper.

In the third tranche, the EGR will be again be converted into physical gold and the beneficial owner will have to surrender the EGR to obtain the physical gold. Post the Budget announcement, SEBI had constituted two working groups involving the stakeholders for the proposed gold exchange framework.

After taking into consideration, the two groups' recommendations, the watchdog has issued the consultation paper, on which comments have been sought till June 18.

SEBI, in the consultation paper, has also sought comments on whether there should be a new exchange or existing stock bourses be allowed to deal in EGR. The regulator noted that the vault manager should ensure that no EGR is created without the presence of physical gold in the vaults.

With regard to product denomination for trading, SEBI said, to begin with, the EGRs of 1 kilogram, 100 grams and 50 grams denomination should be available with the stock exchange with the same denomination for the trading of EGR and conversion of EGR into physical gold.

In order to attract more players to this market, EGRs with smaller denominations such as 10 grams and 5 grams may also be allowed for trading purposes, the consultation paper said.

SEBI said that considering delivery and logistics aspects, conversion of such smaller denomination of EGRs into physical gold may be permitted only when the beneficial owner has accumulated, say, at least 50 grams (or multiples thereof) of physical gold in the form of EGRs.

Another proposal is that if existing stock exchanges are allowed to deal in EGRs, whether the contract should be launched in a new segment or allowed to be added as a new asset class in the existing segment.

SEBI said that setting up a new stock exchange exclusively for EGR has advantages such as single good delivery standard, reduced market fragmentation, improved liquidity and single reference price, among others.

At the same time, the regulator also noted that it will be time-consuming, will require fresh investments in setting up a new stock exchange, clearing corporations, will require fresh registration of members of stock exchanges, will increase compliance cost and may not be viable being based on a single product --.gold available for trading.

Further, the watchdog has sought views on the kind of tax incentives that might be required to make the EGR market liquid. Another suggestion is that EGR should be made fungible and has interoperability between vault managers.

It has also been proposed to regulate the gold exchange-related business of the vault managers and thereby, not hindering the non-gold exchange business of the vault managers. The regulator has come out with draft regulations for the vault managers, including for registration, net worth criteria and security deposit, infrastructure requirements, standard operating procedure, issuance of EGR and action against vault managers.

In addition, SEBI has suggested the requirement of maintenance of records, specified code of conduct and guidelines on segregation of gold exchange and non-gold exchange businesses.

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First Published:May 18, 2021 1:11 PM IST