How EGRs will help you buy and sell gold in spot market

Gold was always considered as a safe investment by many investors one being traditionally seen as a store of value irrespective of the economic cycles and secondly due to the perceived intrinsic value associated with the yellow metal. It has remained a precious commodity in human history and captivated human imagination due to its versatile features of utility. In modern investment history, it has continued its importance with the emergence of financial derivatives based on gold as an underlying asset.

The emergence of Exchange Traded Funds (ETF) has greatly enabled comfortable exposure of this commodity in portfolios. This has allowed the investors to allocate, own and trade gold in electronic form like any of the other financial assets. While most of these ETFs track the price of the actual gold, one can't take a delivery of the metal when required. SEBI (Securities Exchange Board of India) last week has given an in-principle approval for launching Electronic Gold Receipts (EGR). This helps in a transparent price-discovery of spot price of gold.

Bombay Stock Exchange (BSE) has been forefront in pursuing the case for EGRs. It has made several presentations to the government and regulator on the process workflow. This included the participation of banks, vaults, wholesalers, retailers, importers and exporters, etc. that forms the ecosystem.

The rules allow any recognised stock exchange existing or new can launch trading in EGR in a separate segment. The denomination for trading of EGR and conversion of EGR into gold can be decided by the stock exchange with the approval of SEBI. The entire transaction has been divided into three trances: creation of EGR, trading of EGR on the exchange and conversion of EGR into physical gold.

The EGRs would be converted from the gold sourced through vaults which either import or from the exchange accredited domestic refiners. The gold, which complies with either LBMA Good Delivery Standard or with the India Good Delivery Standard or any other standard specified by SEBI will be eligible under the framework. The exchange will empanel Vault Service Providers (VSP) based on guidelines prescribed by SEBI. Likewise, investors could redeem EGRs to physical gold.

The depository would in turn, sends the information about the extinguished EGR to the stock exchange and clearing corporation to carry out necessary revision in the records. The regulation would soon develop an interface between the vault mangers, depositors, stock exchanges and clearing corporations that clear the trade. The current changes are expected to reduce the market inefficiencies and would help integrate spot gold trade with the derivates markets and pave way for a transparent platform for gold trading. This also enables a single point trading for both the spot and derivatives providing scale, liquidity and better pricing for all the market participants by reducing the costs. The regulator also allowed EGRs interoperable between vault managers to enable ease of withdrawal of gold from the vaults.

The vault managers will be registered and regulated as a SEBI intermediary for providing vaulting services meant for gold deposits to create EGRs. The Finance bill (2021-22) i.e., budget had said that the SEBI will be the regulator of the gold exchange and Warehousing Development and Regulatory Authority (WDRA) will be strengthening to set up the commodity market ecosystem. The storage and withdrawal charges will be levied by the vault managers and to be collected by the depository from the beneficial owner of the EGRs for onward payment to the vault managers. Thus, EGRs bring the interoperability of physical and electronic form of gold at ease to the investor. However, some experts believe that the three-tranche model could create hurdles.

(The author is a co-founder of 'Wealocity,' a wealth management firm and could be reached at knk@wealocity.com)