Explained: How EGR Will Help You Buy And Sell Gold In The Spot Market

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With an annual gold demand of around 900 to 1000 tonnes, India is one of the largest importers of gold in the world market. However, it does not have a liquid spot market price for price discovery. The new framework of the markets regulator Securities and Exchange Board of India (SEBI) establishes rules and regulations to enable efficient discovery of the prices of the yellow metal. SEBI proposed the introduction of gold exchange in order to have a better price of gold discovery.

What is the new framework?
According to the SEBI Framework, investors can trade Electronic Gold Receipts (EGRs) on existing exchanges as well as on the proposed gold exchange.

How it works?

  • EGRs will be issued against physical gold
  • Investor can deposit physical gold in vaults and get EGR against it
  • Safes and storage will be maintained by safe managers registered with SEBI
  • Vault Manager and SEBI Registered Custodians will facilitate the issuance of EGRs for physical gold
  • The EGR will be a denomination such as 1kg, 100gm, 50gm, and they will have perpetual validity

What is the role of Gold Exchange?
The Gold Exchange would be a national platform for buying and selling EGR with underlying standardized gold in India. It would also create a national price structure for gold. In addition, the proposed gold exchange is expected to offer a host of benefits to gold market participants and the entire ecosystem.

  • Efficient and transparent price discovery
  • Liquidity of Investments and Gold Quality Assurance

However, SEBI has also authorized existing exchanges as well as new exchanges to allow trading of EGR under separate segments and to decide which gold denominations will be traded.

Who will bear the costs of storing the EGR?
EGR holders will bear the costs of storage. It can make EGR expensive than keeping gold in the house. However, this will reduce the security risks. In addition, one can deposit gold in New Delhi and convert it to EGR but receive an equivalent amount of gold in Mumbai. One EGR can be replaced by another.

How will EGR be taxed?
EGRs will be taxed as collateral under the Securities Contract Act and will be subject to securities transaction tax in accordance with the SEBI consultation paper. The Goods and Services Tax will only be levied on investors who wish to convert their EGR into physical gold. This gives EGR an advantage over physical gold or even digital gold, which is subject to a 3% GST.

What’s on the table for investors?
Investors in India will now have a plethora of options on the table for investing in gold, such as physical gold, gold ETFs, gold funds of funds, gold sovereign bonds (SGBs) and digital gold.

The following table describes the advantages and disadvantages of gold RMS over other available options:

Physical gold ETF / MF on gold Gold EGR Gold sovereign bonds
Security Moo High High High
Interest No No No Yes
Liquidity Moderate High High Moo
STT No No Yes No
GST Yes No No No
Tenor Perpetual Perpetual Perpetual 8 years
Capital gains tax Yes Yes Yes No

(Source: Sebi consultation document)

Overall, EGR will be beneficial for investors in the following context:

  • One nation one price
  • Physical gold market supported by the power of technology
  • EGR will be traded on stock exchanges just like other stocks and securities traded on stock exchanges

(Prathamesh Mallya is AVP Research Non-Agri Commodities and Currencies, Angel One Ltd. Opinions are his)


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