A brief insight into the framework issued by SEBI for Operation of Gold Exchange in India

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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 :-

  1. 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).
  2. 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).
  3. 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

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