Delay in launch of trading in Electronic Gold Receipts in India

Context: Taxation, particularly GST, has led to the delay of launch of trading Electronic Gold Receipt instruments. 

Gold Trading in India:

• India is the second-largest consumer of gold globally, with annual gold demand of approximately 800-900 tonnes and plays a significant role in international gold markets. 
• However, India's domestic commodity market has been facing several challenges in terms of gold exchange trades, like high market fragmentation and low transparency in pricing, etc.
• In this regard, the finance minister during the Union Budget of FY 2021-22, had announced that SEBI would be responsible for becoming the regulator of gold exchanges. 
• At present, investors in India can trade in Gold Futures, Gold ETFs, and Sovereign Gold Bonds. But unlike other countries, the option to trade in spot gold was not available until now. SEBI, in 2021, approved the Framework for Gold Exchange and SEBI (Vault Managers) Regulations, 2021, to enable spot trading in gold.

What are Electronic Gold Receipts (EGRs)?

• EGRs are instruments representing gold in electronic and demat form and notified as securities, with trading, clearing and settlement features. They will be traded on gold exchanges.
• Ministry of Finance added EGRs as securities under the Securities Contract (Regulation) Act, 1956.

Features of Electronic Gold Receipts (EGR)

• EGRs are like stocks which can be traded on exchanges and held in demat accounts.
• Trading exchange holds the underlying value of the EGRs in physical gold in a vault.
• It is the first spot physical gold exchange trading product.
• All market participants are eligible for trading in EGR, individual and institutional.
• Taxed as security under the Securities Contract Act, 1956 and Securities Transaction Tax.
• GST levied on conversion of EGRs into physical gold.
• Capital Gains Tax (CGT) on EGRs if the investment is held for more than 3 years.
• EGRs include both sources of physical gold, imported and domestic.
• Gold confirming to Good Delivery Standard notified by London Bullion Market Association and Bureau of Indian Standard (BIS) is only allowed to be stored as physical gold.  
• There are no limits on maximum deposit of gold by one investor.
• CDSL and NSDL are the depositories holding the EGRs of beneficial owners.
• Inter-operability between the vault managers has been allowed.  

Criteria for Vault managers:

• A corporate body incorporated in India.
• A net worth of at least Rs. 50 crores.
• Regulated by SEBI as an intermediary.

Need for an Indian Gold Spot Exchange

• Efficient price discovery of Gold: India is the second largest consumer of gold in the world. But India is largely dependent on imports for meeting the domestic demand. This lopsided demand vs. production makes India the largest importer of gold, affecting the balance of payments and makes India a price taker rather than price maker. But the real time price discovery mechanism through spot trading of EGRs can transform India into a price maker.
• Ensure uniform national prices of Gold: In the physical market, different locations have different prices of gold. So, Gold prices are not uniform. Hence, Gold Spot Exchange will ensure that a uniform price prevails pan-India based on market principles.
• Efficient gold spot market: Lead to efficient and transparent domestic spot price discovery, assurance in quality of gold, promotion of Gold conforming to Good Delivery Standard with active retail participation, greater integration with financial markets, and augment greater gold recycling in the country.
• Help India in evolving as Global gold trading hub.

Way forward

Recent steps of Indian government like launch of India International Bullion Exchange at GIFT IFSC, investment in Sovereign Gold Bonds, Electronic Gold Receipts are steps in the right direction. Going forward, existing issues like delay due to GST applicability on EGRs need to be addressed to further streamline the gold trading in India.