SEBI has released a consultation paper (Link) on proposed framework for a gold exchange in India and draft SEBI (Vault Managers) Regulations. In the consultation paper, SEBI has sought opinion on the modalities of operations of the exchange, registration of the vault managers (VMs) as SEBI intermediaries, and issuing regulations for the VMs. This follows up the government decision to notify SEBI as the regulator of the entire ecosystem of the proposed gold exchange including vaulting, assaying and gold quality, and delivery standards. In a similar way, the government recently notified that International Financial Services Centre (IFSC) in GIFT City, Gujarat, will be able to regulate: 1) bullion spot delivery contract, and 2) bullion depository receipt with underlying bullion financial products and services. (Link)
Key points to look forward is the role that the current exchanges will play in any new gold exchange in terms of possibility of joint or exclusive operations. It will also usher an important role for depositories, VMs, and clearing corporations. Liquidity management for the new exchange will be an important aspect and the consultation paper attempts to address concerns on logistics, taxation, fungibility and storage along with clear demarcation of roles of each stakeholder.
- Government thrust on setting up a gold exchange has several structural targets including: 1) to create a vibrant gold ecosystem in India commensurate with India's large share in global gold consumption. The proposed gold exchange would lead to efficient and transparent domestic spot price discovery, assurance in the quality of gold, and promotion of India gold delivery standards. 2) Increase active retail participation, greater integration with financial markets, and augment greater gold recycling in the country. 3) Enable India to become a price setter of gold globally in line with the huge domestic demand.
- Two working groups were made by SEBI in this regard, who submitted reports on the nature and flow of the traded instrument on 27th Apr'21. The terms of reference for the first working group involved understanding the transaction flow from physical gold to electronic receipt and back to physical gold, role of each entity in the transaction flow, storage and handling capacity of existing vaults, clearing and settlement, risk management, taxation, etc. Terms of reference for the second working group involved understanding the various sources from where the gold is channelised for trading in the physical market, determining financial requirements for setting up vault managers (VMs), understanding the safety and security features followed by the VMs, and understanding the mechanism of verification.
- Nomenclature of the instrument: It is considered that the instrument may be termed 'Electronic Gold Receipt' (EGR).
- Proposed flow of transactions in the gold exchange: After extensive consultations, discussions with various stakeholders and considering the recommendations made by the two working groups, the entire transaction in the proposed gold exchange has been divided into three tranches as detailed in the inside pages.