Framework For Setting Up Spot Gold Exchange

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    Recently, The Securities and Exchange Board of India (SEBI) proposed a framework for setting up a Spot Gold Exchange.

    • The proposal was first announced by the finance minister in the Union Budget this year 2021.

    What is the Spot Exchange?

    • The spot market is where financial instruments, such as commodities, currencies, and securities, are traded for immediate delivery. 
      • Delivery is the exchange of cash for the financial instrument. 

    Proposed Framework

    • The instrument to be traded on the bourse can be termed as an ‘Electronic Gold Receipt’ (EGR) and the entire transaction mechanism can be divided into three tranches.
    • In the first tranche, an entity desirous of delivering gold, locally manufactured or imported, on the exchange platform would have to approach a SEBI regulated vault manager and deposit physical gold meeting quality and quantity parameters with it.
    • In the second tranche, the vault manager will issue an EGR, which will be tradeable on the exchanges.
    • In the third tranche, a beneficial owner will surrender the EGR to a vault manager and take delivery of the gold.
    • In this regard, a common interface between the vault managers, depositories, stock exchanges and clearing corporations has been suggested.
    • The proposed denominations – reflecting underlying physical gold – of EGRs are 1 kilogram, 100 gram, 50 gram and subject to conditions, those can also be even for 5 and 10 gram.
      • Sebi has sought comments on allowing trading in quantities as low as 5 grammes, permitting multiple spot exchanges, incentivising trading on the exchange platform, and having a single gold price across the country with transportation cost adjusted as premium or discounted from traded price.
    • STT (Security Transaction Tax) will be levied on the trading of the EGR and IGST (Integrated Goods and Services Tax) at the time of delivery.

    Issues Raised By SEBI

    • This includes fungibility and interoperability between vault managers. 
      • Fungibility means gold deposited under, say, EGR 1 can be delivered against surrender of EGR 2 meeting the same contract specifications.
      • Interoperability means gold deposited at one location and with one vault manager can be withdrawn from a different location of the same or different vault manager, subject to availability of the physical gold. This will reduce the cost for buyers.

                                       Image Courtesy: BS 

    Need And Objectives

    • The proposed gold exchange is extremely necessary to create a vibrant gold ecosystem in India.
    • With an annual gold demand of approximately 900 tonnes, India holds an important position in the global gold market.
      • Despite being second only to China in consumption of gold, India remains a price taker in the global market and at present, the country does not play any significant role in influencing the global price setting for the commodity.
    • The objective behind setting up gold exchanges is for India to become a price setter rather than a price taker and to establish an India good delivery standard, akin to London Bullion Market Association (LBMA) accredited gold bars. 
      • The gold bars have to be BIS or LBMA accredited.
    • Setting up a new stock spot gold exchange has advantages such as single good delivery standard, reduced market fragmentation, improved liquidity, single reference price etc. 
    • It would lead to efficient and transparent domestic spot price discovery, assurance in the quality of gold.
    • It would help in the promotion of Indian good delivery standards with active retail participation, greater integration with financial markets and augment gold recycling in the country.

    Securities and Exchange Board of India (SEBI)

    • It was established on April 12, 1992, in accordance with the provisions of the Securities and Exchange Board of India Act, 1992.
    • It is a statutory body that is constituted as the regulator of capital markets in India under a resolution of the Government of India.
    • Aim: To protect the interests of investors in securities and to promote the development of, and regulate the securities market.
      • It is the regulator of the securities and commodity market in India owned by the Government of India

    Bourse

    • A bourse is a market organized for the purpose of buying and selling securities, commodities, options and other investments. The term bourse is most often used in Europe and can be synonymous with an exchange. 

    Securities Transaction Tax (STT)

    • It is a tax levied at the time of purchase and sale of securities listed on stock exchanges in India.
    • This tax was introduced in the 2004 Union Budget and came into effect on 1 October 2004
    • Securities are tradable investment instruments such as shares, bonds, debentures, equity-oriented mutual funds (MFs) and so on and are issued either by companies or by the Indian government.
    • The rate of STT differs based on the type of security traded and whether the transaction is a purchase or a sale.

    Integrated Goods and Services Tax(IGST)

    • It is levied on all the inter-state transfer of goods and services and is governed by the IGST Act 2017.
    • IGST will be applicable on any supply of goods and/or services in both cases of import into India and export from India.

    Source:BS