SEBI sets the framework for operationalising the gold exchange in India

SEBI issued a circular on 10th January 2022 that specifies the framework for gold exchange in India. This circular comes after a proposal in September to set up a gold exchange, followed by new regulations notified in December 2021 for vault managers looking to provide vaulting services for the gold traded through the gold trading instrument at proposed gold exchanges. The trading instrument in gold exchanges in India shall be referred to as ‘Electronic Gold Receipts’ (EGR), which has already been notified as ‘securities’.

The recognised stock exchanges willing to deal in EGR should create a new segment. 

The structure of the entire transaction has been divided into three tranches- Creation of EGR, trending of EGR in a stock exchange and conversion of EGR into physical gold.

The depositories will develop a common interface that will be accessible to all the entities, i.e. Vault Managers, Depositories, Stock Exchanges and Clearing Corporations. 

The Vault Manages to ensure that the gold meets the criteria that the gold is deposited only through an accredited refinery or a nominated agency. The existing deposit of gold in the vaults meeting the criteria mentioned above and has never been out of the vaulting infrastructure can be considered for conversion into EGR.

Further, the standard of gold would comply either with LBMA gold Delivery Standard or with the India Gold delivery Standard or any other SEBI specified standard.

In the First tranche relates to the creation of EGR, the guidelines specify that the vault manager should record the information of receipt of physical gold in the common interface and create the EGR. The vault manager should create the EGR on behalf of the depositor (owner of gold), intending to convert physical gold into EGR. The EGR shall reflect in the Demat account of the beneficial owner maintained with the depository participant. The depository is then responsible for making EGR’s tradeable on the stock exchange.

The Vault manager and depository are responsible for reconciling the EGR’s created with the corresponding physical gold lying in the vaults. Further, the depository is responsible for inspecting the physical gold deposited in the vaults at periodic intervals, where SEBI will specify periodicity.

In the second tranche, SEBI defines the responsibilities of the stock exchanges, depositories and the clearing corporation to trade EGRs. 

It states that the stock exchanges will have to keep the EGR’s tradeable on the stock exchanges continuously. 

Further, the depositories are responsible for sharing information of EGR created to the stock exchanges and clearing corporations periodically.

The clearing corporation is responsible for settling the trades executed on the stock exchanges.

The third tranche is related to the conversion of EGR into physical gold. If the beneficial owner intends to convert the EGRs into physical gold, they can request the depository for the same. The depository will forward the request to the vault manager to deliver the gold to the beneficial owner and simultaneously extinguish such EGRs. The depository is then responsible for reporting the extinguished EGRs to the stock exchanges and clearing corporations.

Moreover, the circular mentions the fungibility and interoperability guidelines between the vault managers, withdrawal centre, storage and withdrawal charges.

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