NEW GOLD SPOT EXCHANGE PROPOSED BY SEBI

NEW GOLD SPOT EXCHANGE PROPOSED BY SEBI

Subject: Economics

Context: The Securities and Exchange Board of India (SEBI) has added a breath of freshness to the commodity market by floating the idea of having a new gold spot exchange.

Concept:

• The spot exchange is where financial instruments, such as commodities, currencies, and securities, are traded for immediate delivery.
• SEBI is a statutory body established in April, 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992.

Framework of Gold Exchange:

• In the first tranche, an entity desirous of delivering gold, locally manufactured or imported, on the exchange platform would have to approach a SEBI regulated vault manager and deposit physical gold meeting quality and quantity parameters with it.
• Against this, the vault manager will issue an EGR (Electronic Gold Receipt), which will be tradeable on the exchanges, in the second tranche.
• A beneficial owner will surrender the EGR to a vault manager and take delivery of the gold in the third tranche.
• A common interface will be developed between vault managers, depositories, clearing corporations and stock exchanges to enable seamless execution of the three tranches.
• The proposed denominations – reflecting underlying physical gold – of EGRs are 1 kilogram, 100 gram, 50 gram and subject to conditions, those can also be even for 5 and 10 gram.
• STT (Security Transaction Tax) will be levied on trading of the EGR and IGST (Integrated Goods and Services Tax) at the time of delivery.

Reason for Creating Separate Exchange for Gold:

• To create a vibrant gold ecosystem in India which is commensurate with its large share of global gold consumption.
• India (after China) is the second largest consumer of gold globally, with annual gold demand of approximately 800-900 tonnes, and holds an important position in the global markets.
• The objective behind setting up gold exchanges is for India to become a price setter rather than a price taker and to establish an India good delivery standard, akin to London Bullion Market Association (LBMA) accredited gold bars.
• Setting up a new stock spot gold exchange has advantages such as single good delivery standard, reduced market fragmentation, improved liquidity, and single reference price.