Transforming Gold Investments in India

By Samir Patil

Gold has always been an essential part of the socio-economic and cultural ethos of every Indian. As an investment, it has always carried with it the tendency to invoke a sense of sentimental attachment. Despite its enormous importance, gold investments have not kept pace in terms of ease of purchase, storage and security. These factors motivated BSE to create a transparent and efficient investment mechanism for gold.

Role of BSE in the Development of the Indian Gold Market:

ESB has been at the forefront of the case for EGRs. He made several presentations to the government and the regulator on the workflow of the process. This included interfacing with Shri Shaktikanta Das ji, then Secretary of the Ministry of Finance, and seeking participation from banks, safes, wholesalers, retailers, importers and exporters, etc. that form the ecosystem.

BSE’s first commitment paid off on October 1, 2018, when it became India’s first universal exchange by adding gold derivatives to its product portfolio. With a view to further broaden and deepen the gold markets, at the suggestion of the BSE, a framework to introduce “spot options” commodity prices instead of futures prices has been authorized. BSE launched the first commodity option contracts on gold mini and silver kg based on spot prices from June 1, 2020.

BSE has become the first Indian exchange to comply with India’s Good Delivery Standard on its Commodity Platform by adopting Notified Bureau of Indian Standard (BIS) – IS 17278:2019, for Delivery gold and silver. This was in line with the Prime Minister’s vision of ‘Make in India’ and ‘Aatmanirbhar Bharat’ of a self-reliant nation.

With this step, BSE wanted to underline its commitment and priority to its own delivery standards and emerge as a price setter rather than a price taker in the bullion trade. BSE also consistently executed delivery gold for all contracts in LBMA and IGDS standards in its designated vault in Ahmedabad.

BSE has also played a pivotal role in the success of the India International Bullion Exchange (IIBX), of which BSE’s wholly-owned subsidiary, BSE Technologies, is the technology provider. India INX, a subsidiary of BSE, and India ICC hold 20% of the capital of IIBX.

Gold spot trading:

The BSE has made several presentations to government and regulators on how the gold spot trading process can work and how participants of different types including banks, safes, wholesalers , retailers, importers, exporters, etc. participate in this ecosystem. The BSE was also part of the Niti Aayog committee on the transformation of the Indian gold sector, after which the Indian government in the 2018-2019 budget announced its intention to establish a system of gold exchanges regulated in the country. Further, in the Union Budget 2021-22, Hon. Finance Minister Nirmala Sitharaman ji announced the establishment of a spot gold exchange, and that the Securities and Exchange Board of India ( SEBI) will be the designated regulator for the proposed gold exchange.

Subsequently, at its board meeting held on September 28, 2021, SEBI introduced two new investment instruments – Electronic Gold Receipts (EGRs) and Silver ETFs. The instrument representing gold, i.e. EGR, will have trading, clearing and settlement functions similar to other securities currently available in India. It is to SEBI’s testimony that several new and innovative products, including EGRs, have been launched in a short period of time.

What are EGRs:

Currently, India only allows gold derivatives and gold ETFs to be traded, unlike several other countries that have spot exchanges for physical gold trading. After SEBI board approval, Indian investors will soon see a new class of security known as EGR which will be available for trading on exchanges like ESB. Like stocks, these EGR will be held in the form of demat and can be converted into physical gold if necessary. This is part of SEBI’s plan to enable spot gold trading on exchanges.

To enable trading in physical gold, it is proposed that gold in the form of a certificate of deposit (backed by physical gold) be traded and settled on an exchange. The entire trading will be done in three tranches which include the conversion of physical gold into EGR, the trading of EGR and again the conversion of EGR into physical gold. ESB plans to launch EGR in different variants and denominations ranging from 1 kg to 1 gram to attract investors and participation from all classes in a phased manner.

The source of supply for the physical gold to be converted into EGR will be the deposit of fresh gold, entering the vaults, either through imports or through national refineries accredited by the exchange(s). A customer can also convert physical gold into EGR by depositing physical gold at the designated delivery center. Exchanges must constitute Vault Service Providers (VSPs) based on the guidelines prescribed by SEBI. Similarly, customers can exchange the EGR for physical gold, and the process is complete. An interface will be developed between vault managers (of physical gold), custodians (who hold EGR in demat) and exchanges and clearing houses who clear the trade.

Benefits:

Such a product will appeal to all market participants, which means that buyers and sellers on the exchange should include individual investors, as well as commercial actors along the value chain such as importers, banks, refiners, bullion dealers, jewelry manufacturers and retailers. This can play a transformative role in the development of the Indian gold market encompassing the whole ecosystem and create a vibrant gold ecosystem in India by enabling the real fungibility of gold which is the need Of time. The regulator has also enabled EGR interoperability between vault managers to facilitate the withdrawal of gold from vaults.

The idea of ​​spot trading via the EGR will lead to a single gold price for a nation. The standard gold that will be traded under the EGR will help create a uniform price structure for gold across the country. Currently, there is no gold price in the country. This can reduce existing market inefficiencies that exist in bullion trading and can act as a bridge in integrating spot gold trading with derivatives markets and create a transparent platform for bullion trading.

A single trading point for spot and derivatives would provide scale, liquidity and better pricing for all market participants by significantly reducing costs and cycle time. EGR trading will also greatly contribute to existing gold monetization programs such as the Gold Monetization Program (GMS), Gold Bonds and Gold Deposits.

Next steps:

ESB is also well known for its technological prowess and has always been the fastest, seamless solution for all new products, including raw materials. The ESB has the technology for such an EGR exchange and has received approval in principle from SEBI. Mock trades and system testing are currently underway, and BSE is ready to launch EGR as a separate segment.

(Sameer Patil is Commercial Director at BSE and Director at India INX and ICC)

Advertising