Know how the gold exchange will work

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The Securities and Exchange Board of India (Sebi) has finally given it’s nod to the framework for gold exchange in India. This means, just like stocks, gold will also be bought and sold easily hereon. This much anticipated move comes after finance minister Nirmala Sitharaman announced Sebi as the regulator for spot gold exchanges in the Union budget this year.

The gold exchange will function similar to the regular stock exchange and allow people to place orders for buying and selling the yellow metal. Sebi has mentioned in the draft proposal that the name of the new gold exchange will be Electronic Gold Receipt (EGR). This exchange will possess the trading, clearing and settlement features like any other security instruments traded on exchanges. EGRs will be notified as securities under the Securities Contracts (Regulation) Act 1956.

Asif Iqbal, head of research at Escort Security, told TV9 Hindi that gold exchange works similar to a stock exchange. In this, people place orders for buying and selling of gold. After this, the gold is delivered to the buyers. This is again similar to how after the purchase of shares in the stock market, it gets transferred to a demat account. In the same way, gold is delivered to the buyer. If the investor wishes, he can also decide not to take physical delivery and later sell at a profit.

Any corporate entity, known as vault managers, registered with Sebi and having a net worth of Rs 50 crore will be eligible for gold deposits, safekeeping and storage of gold and creating these EGRs. Sebi explicitly mentioned that any exchange, existing or new, can launch trading in EGRs and decide the denomination for trading (say, 1 gm, 2 gm, 10 gm etc). One can hold the EGR for as long as the validity. If the EGR holder wants to convert it into underlying gold, it can be done by surrending the instrument with a vault manager.

Gold depository

The vault will be the common platform of the depository, exchange, clearing corp. The gold will go to the vault and the vault manager will give you an Electronic Gold Receipt. After checking the EGR, the depository will then issue the ISIN code for trading. Once the ISIN is issued, the EGR will be ready for trading on the exchange. After receiving the EGR information from the depository, the listing on the exchange will be traded again. Clearing Corporation will settle the EGR traded on the exchange like shares.

What will be the benefit of gold exchange to the common man? Asif explained that India is the second largest consumer and importer country in the world.

“In such a situation, there will be several benefits from becoming a gold exchange. For example, buying and selling of gold will be possible all the time in the spot gold exchange. With this, the exact price of gold will be known. Because in India, the price is different from city to city. Also, these prices are decided by the gold jewelers. The value of gold that will be known by trading on the Gold Exchange of India can be known as ‘India Gold Price’,” he noted.