Securities and Exchange Board of India on 10th Jan,2022 issued a circular providing the framework for operationalizing the Gold Exchange where the metal will be traded as Electronic Gold Receipts (EGRs).
The Circular came after SEBI on September 28, 2021 approved the framework for Gold Exchange and SEBI (Vault Managers) Regulations, 2021 which was notified by the govt on 31.12.2021 and vide Gazette notification dated December 24, 2021 the Govt of India declared “electronic gold receipts” as ‘securities’ under Section 2(h)(iia) of the Securities Contracts (Regulation) Act 1956 and this paved way for this circular providing framework for operationalization of Gold Exchange in India
The circular provides that the instrument for trading in Gold Exchange /Segment shall be referred to as ‘Electronic Gold Receipts’ (EGR) which has been notified as ‘securities’ under Section 2(h)(iia) of the Securities Contracts (Regulation) Act ,1956.
Further, the supply of the physical gold, to be converted into EGR, shall be the fresh deposit of gold, coming into the vaults – mentioned the circular.
The stock exchange/s desirous of trading in electronic gold receipts (EGRs) may apply to SEBI for approval of trading of EGRs in new segment and the circular shall come into the force with immediate effect : said the regulator
It has also mentioned that a common interface will be developed by Depositories, which will be made accessible to all the entities i.e. Vault Managers, Depositories, Stock Exchanges and Clearing Corporations.
The circular divides the entire transaction into three tranches which are named as follows:
- First Tranche: Creation of EGR
- Second Tranche: Trading of EGR on stock exchange/s
- Third Tranche: Conversion of EGR into Physical Gold
In the first tranche
The vault managers on receipt of physical gold shall record the relevant information in the common interface and create the EGR. The EGR shall be created at the behest of the depositor (or owner of the gold) intending to convert physical gold into EGR. and he shall ensure that no EGR is created without the presence of corresponding physical gold in its vaults. The EGR will reflect in the demat account of the beneficial owner maintained with the Depository Participant. The Depository shall take necessary action to make EGR/s tradeable on the stock exchange/s.
In the second tranche
The stock exchanges shall allow trading of the EGRs on a continuous basis. Further, the Depositories shall share information pertaining to the creation of EGR/s, with the stock exchanges and clearing corporations on a periodic basis. Further, the Clearing Corporation shall settle the trades executed on the stock exchange/s, by way of transferring EGR/s and cash to the buyer and seller of EGR/s, respectively.
In the Third tranche
Beneficial owner of EGR intending to obtain physical gold against the EGR/s shall request the Depository for the same. The Depository, in turn shall forward such request/s to the Vault Manager. The Vault Manager after delivering the gold to the beneficial owner and simultaneously extinguishing such EGR/s, shall share the required data with the Depository for reconciliation. The Depository, in turn, shall send the information about the extinguished EGR/s, to the stock exchange/s and clearing corporation/s to carry out necessary revision in the records.
Further, the circular also provides for the Fungibility and the Inter- Operability of the EGR which are as follows :-
- Fungibility means , the EGR’s created by the Vault Manager/s, shall not be linked with the unique bar reference number of the physical gold, i.e., gold deposited against EGR1 can be delivered against conversion of EGR2 into gold (for the same contract specifications).
- “Inter-operability between Vault Managers” means the physical gold deposited at one location of a Vault Manager, can be withdrawn from different location of same or different Vault Manager (depending on the availability of physical gold).
- The aforementioned provisions would allow the Depository to facilitate withdrawal of physical gold from the preferred vault location of the buyer, to the extent possible, and possibly, save upon the cost of withdrawal of gold from the vaults.
In this way, the SEBI has proposed the operations of the New Gold Exchange. The above posts just mentions the highlights of the circular and the whole circular can be accessed at SEBI’s Website