Gold electronic receipts are now “securities”, according to the Ministry of Finance

The Ministry of Finance specified “Gold Electronic Receipts” (EGR) as “securities” under the Securities Contracts (Regulation) Act 1956, paving the way for these instruments to be traded on any new gold exchange that could appear in the country.

This move would also allow EGR trading on existing exchanges under a separate segment. Like the shares, the EGR will be held in the form of demat and can be converted into physical gold if necessary. With the move, EGR will have trading, clearing and settlement functionality similar to any other, official sources said.

Simply put, an EGR is an electronic receipt issued on the basis of an underlying physical gold deposit in accordance with regulations issued by SEBI.

Finance Minister Nirmala Sitharaman said in the 2021-2022 budget that the Securities and Exchange Board of India (SEBI) would be the regulator of gold exchanges and that the Warehouse Development and Regulatory Authority would be strengthened to set up the ecosystem of the commodity market.

He may recall that the market regulator SEBI in September of this year gave the green light to the establishment of a gold exchange in which the yellow metal would be traded in the form of an EGR. SEBI then declared that any recognized exchange, whether existing or new, could initiate EGR trading in a separate segment. The denomination for trading of EGRs and the conversion of an EGR into gold may be decided by the exchanges with the approval of SEBI.

SEBI said at the time that the gold exchange encompassing the entire ecosystem of EGR trading and physical gold delivery should create a vibrant gold ecosystem in India.

Benefit Host

He noted that the gold exchange is expected to offer a multitude of benefits for participants in the value chain as well as for the entire ecosystem of the gold market, such as efficient price discovery and transparency, investment liquidity, gold quality assurance, etc.

The EGR holder can continue to hold the EGRs for as long as expected, as the EGRs will have perpetual validity. An EGR holder may also, at its discretion, withdraw the underlying gold from the vaults upon delivery of such receipts.

To reduce the costs associated with removing gold from vaults, SEBI said EGR would be made “fungible” and “interoperability between vault managers” would be allowed.

Regulate vault managers

SEBI has previously said it will regulate vault managers, who will need to register with the market regulator, as an intermediary to provide vault services for gold deposited to create EGRs.

The obligations of the Vault Manager include accepting deposits, storing and holding gold, creating and removing EGR, settling grievances, and periodically reconciling physical gold with the records of the depositary. India is one of the biggest consumers of gold with an annual demand of around 900 tonnes. A SEBI document for public comment said EGR trading would attract the Securities Transaction Tax and the Goods and Services Tax (GST) early on.

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