The New GOLD Framework By The Regulator

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Prathamesh Mallya
Prathamesh Mallya

BY: Prathamesh Mallya, AVP- Research, Non-Agri Commodities, and Currencies, Angel One Ltd

India’s annual demand for gold has been around 900-1000 tonnes annually. It is one of the largest importers of gold from the world market; however, it does not have any liquid spot market price for price discovery. The new framework by SEBI, Securities and Exchange Board of India, lays down rules and regulations to bring inefficient price discovery for the yellow metal.

SEBI has proposed the introduction of gold exchange in order to have a better price discovery of gold

  1. What is the new framework?

According to the SEBI framework, investors can trade in electronic gold receipts (EGRs) on existing stock exchanges as well as the proposed gold exchange.

  1. How does it work?
  2. EGRs will be issued against physical gold
  3. Investor can deposit physical gold in vaults and get EGR issued against it
  4. Vaults and storage will be maintained by vault managers registered with SEBI
  5. The vault manager and SEBI registered depositories will facilitate the issuance of EGRs against the physical gold
  6. The EGRs will be a denomination such as 1kg, 100gm, 50gm, and they will have perpetual validity
  7. What is the role of theGold Exchange proposed by the regulator?

Ans- The gold exchange would be a national platform for buying and selling EGRs with underlying standardized gold in India. It would also create a national pricing structure for gold. Moreover, the proposed gold exchange is expected to offer a host of benefits to the participants in the gold market and the entire ecosystem

  • Efficient and transparent price discovery
  • Liquidity in the investments, and assurance in the quality of gold

However, SEBI has also permitted existing as well as new stock exchanges to allow trading in EGRs under separate segments and also decide the gold denominations that will be traded

  • Who will bear the charges for storing EGRs?

Ans- The holders of the EGRs will bear the storage charges. This can make the EGRs expensive than keeping the gold at home, however, it will lower security risks. Moreover, one can deposit gold in New Delhi and convert it into EGRs but receive an equivalent amount of gold in Mumbai. One EGR can be interchanged for another

  • Taxation of the EGRs

Ans- EGRs will be taxed as security under the Securities Contract Act and will be subject to Securities Transaction Tax as per the consultation paper by the regulator, SEBI. Goods and Service tax will be levied only on investors who wish to convert their EGRs into physical gold. This results in an advantage to the EGRs over physical gold or even digital gold, which are subject to 3 percent GST.

  • What is there for investors on the table?

Ans- Investors in India will now have a plethora of options on the table for investing in gold such as physical gold, gold ETF’s, gold fund of funds, sovereign gold bonds (SGBs), and digital gold.

The following table depicts the advantages and disadvantages of gold SGRs over other available options

 Physical GoldGold ETF/MFGold EGRsSovereign Gold Bonds
SafetyLowHighHighHigh
InterestNoNoNoYes
LiquidityModerateHighHighLow
STTNoNoYesNo
GSTYesNoNoNo
TenorPerpetualPerpetualPerpetual8 Years
Capital Gains TaxYesYesYesNo
Source – As per Sebi consultation paper

In totality, EGRs will be beneficial to the investors in the following context

  1. One nation one price
  2. Marketplace for physical gold backed by the power of technology
  3. EGRs will be traded on exchanges just like other stocks and securities that are traded on the exchanges

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