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How India's spot gold exchange will work

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Photo: iStock

India has a demand for 800-900 tonnes of gold annually. It is a big importer, but has no large liquid spot market for price discovery. The Securities and Exchange Board of India (Sebi) has fleshed out a proposal for a gold exchange. Mint takes a look.

India has a demand for 800-900 tonnes of gold annually. It is a big importer, but has no large liquid spot market for price discovery. The Securities and Exchange Board of India (Sebi) has fleshed out a proposal for a gold exchange. Mint takes a look.

How’ll gold be traded in the new framework?

Investors can trade in electronic gold receipts (EGRs) on existing stock exchanges as well as the proposed gold exchange, according to the Sebi framework. EGRs will be issued against physical gold. An investor can deposit physical gold in vaults and get EGRs issued against it. The vaults and storage will be maintained by vault managers registered by Sebi. The vault manager and Sebi registered depositories will facilitate the issuance of EGRs against the physical gold. The EGRs will be of denominations such as 1kg, 100gm, and 50gm. EGRs will have perpetual validity.

How does the gold exchange function?

The gold exchange would be a national platform for buying and selling EGRs with underlying standardized gold in India, according to Sebi. It would also create a national pricing structure for gold. The gold exchange is expected to offer a host of benefits for value-chain participants as well as for the entire gold market ecosystem, such as efficient and transparent price discovery, investment liquidity, and assurance in the quality of gold. But existing as well as new stock exchanges have also been permitted to allow trading in EGRs under separate segments and also decide the gold denominations that will be traded.

The new framework
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The new framework

Who will bear the charges for storing EGRs?

The holders of EGRs will bear the storage charges, according to the Sebi consultation paper. This can make the EGRs more expensive than keeping gold at home, but will lower security risks. In addition, one can deposit gold in New Delhi and convert it into EGRs but receive an equivalent amount of gold in Mumbai. One EGR can be interchanged for another.

How will EGRs be taxed?

EGRs will be treated as security under the Securities Contract Act and will be subject to Securities Transaction Tax, as per the consultation paper. Goods and services tax will only be levied on investors who wish to convert their EGRs into physical gold. This confers an advantage to EGRs over physical gold or even digital gold, which are subject to 3% GST. Some chartered accountants are of the opinion that EGRs will qualify for long-term capital gains after a 1-year holding period compared to 3 years for gold or even gold ETFs.

What are the pros and cons?

Indian investors have a plethora of options for investing in gold, including the physical gold market, gold ETFs, gold fund of funds, sovereign gold bonds (SGBs), and digital gold. Each has its own advantages and disadvantages. The gold exchange and gold EGRs potentially score high on liquidity, safety and tax efficiency, making them a strong contender for those taking a short to medium term view on gold. SGBs, however, retain an edge for long-term retail investors because of the 2.5% annual interest they carry.

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