GM Stock – SEBI unveils roadmap for bullion trading

Indian investors will soon see a new class of security known as Electronic Gold Receipts (EGR) that will be available for trading on the stock exchanges. Like shares, these EGRs will be held in demat form and can be converted into physical gold when needed. This is part of SEBI’s plan to allow trading of spot gold on the exchange platforms.

India is one of the world’s largest consumers of gold with annual demand of around 900-1,000 tonnes. But the purchase of spot gold is only on over-the-counter market as of now. In this year’s Budget, the Finance Minister had designated SEBI as a regulator for spot exchanges. The National Stock Exchange, BSE, the Multi Commodity Exchange and National Commodity & Derivatives Exchange are expected to be given permission initially to trade EGRs.

One nation, one price

As per a SEBI paper put out for public comments, EGR trading will attract a Securities Transaction Tax (STT) and GST from the beginning. A working group on spot gold exchange has recommended that the entire trading be done in three tranches that include conversion from physical gold to EGRs, trading of EGRs and again conversion of EGR back to physical gold. An interface will be developed between the vault managers (of physical gold), depositories (that hold EGRs in demat) and stock exchanges and clearing corporations that clear the trade. Making EGR fungible and allowing inter-operability between vault managers are being considered.

“Idea of gold exchange and EGR will lead to one nation one price of the yellow metal. Currently, gold prices vary in different towns and cities in India. Trading will flourish if there is clarity on tax matters right from the beginning. The issue now is how will importers of gold or the large sellers and refiners get GST credit since the EGR purchaser could hoard it for years and pay GST when he sells,” said Prithviraj Kothari, MD, RSBL and former president Bombay Bullion Association.

“Transparency will grow in gold trade and all retail stores will become sub-brokers. Their business will not be affected but the cut or brokerage on turnover will be open book,” said Bhargav Vaidya, leading Gold trade analyst.

To begin with, EGR of 1 kg, 100 gm and 50 gm denominations will be made available and the same can be converted to physical gold. To attract retail investors, EGR with smaller denominations of 10 gm and 5 gm will also be traded. The source of supply of the physical gold to be converted into EGR will be the fresh deposit of gold, coming into the vaults, either through imports or through stock exchange/s accredited domestic refineries.

The existing gold deposit lying in the vaults, which meets the source criteria and has never been out of the vaulting infrastructure, may be transferred to the instant vault for conversion into EGR. The depositor (or owner of the gold) intending to convert physical gold into EGR and trade on the exchanges will have to ensure delivery of such gold to the vault manager, who will then record relevant information in the common interface and create the EGR. All the other areas of default claims, trading settlement will work like the stock exchange ecosystem.