SEBI’s new framework on gold: Here are 5 things to know

Investing in gold can be done in various forms, including physical gold, sovereign gold bonds, gold ETFs and the latest option: gold EGR (Electronic Gold Receipts). While there is a lot of literature on other forms of investment, not much has been written about gold EGR.

So, let us know what this investment means for investors.

India’s annual demand for gold is around 900-1,000 tonnes. It is one of the largest importers of gold from the world market; However, it does not have a liquid spot market price for price discovery.

A new framework by SEBI (Securities and Exchange Board of India) lays down rules and regulations to facilitate efficient price discovery for the yellow metal. SEBI has proposed introduction of gold exchange to improve gold price discovery.

1. What is the new framework?

As per the SEBI framework, investors can trade in Electronic Gold Receipts (EGRs) on existing stock exchanges as well as proposed gold exchanges.

How does it work?

• EGR will be issued against physical gold
• Investor can deposit physical gold in vaults and issue EGR against it
• Vault and storage will be maintained by vault managers registered with SEBI
• Vault managers and SEBI registered depositories will facilitate EGR issuance against physical gold.
• EGR will have denominations like 1kg, 100gm, 50gm and will have permanent validity.

2. What is the role of gold exchange proposed by the regulator?

Gold Exchange will serve as a national platform for buying and selling Electronic Gold Receipts (EGRs) backed by standardized gold in India. It aims to establish a national pricing structure for gold. Additionally, the proposed gold exchange is expected to provide several benefits to participants in the gold market and the ecosystem as a whole.

• Efficient and transparent price search
• Liquidity in investment and assurance in quality of gold

However, SEBI has also allowed existing and new stock exchanges to allow trading in Electronic Gold Receipts (EGRs) under separate segments and to determine gold denominations.

3) Who will bear the charges for storing EGR?

Holders of Electronic Gold Receipts (EGRs) will incur storage charges. This can make EGR more expensive than keeping gold in-house; However, it will reduce security risks. Additionally, one can deposit gold in New Delhi and convert it to EGR, while receiving the gold in Mumbai. One EGR can be substituted for another.

4) Taxation of EGRs

EGRs will be taxed as securities under the Securities Contracts Act and will be subject to securities transaction tax, according to a consultation paper by the regulator, SEBI. Goods and Services Tax (GST) will be levied only on investors who want to convert their EGR into physical gold. This gives EGR an advantage over physical gold or even digital gold, which is subject to 3% GST.

5) What is on the table for investors

Investors in India will now have many options to invest in gold, including physical gold, gold ETFs, gold fund of funds, sovereign gold bonds (SGBs) and digital gold.

The table below shows the advantages and disadvantages of Gold SGR over other available options

Overall, EGR will be beneficial for investors in the following respects

1. One nation one price
2. A market for physical gold backed by technical strength
3. EGR will be traded on exchanges like other stocks and securities

(The author is Deputy Vice President, Research, Non-Agri Commodities and Currencies)

(Disclaimer: Recommendations, suggestions, opinions and views given by experts are their own. These do not represent the views of Economic Times)