India is the second largest consumer of gold in the world and its households sit on a large hoard of bullion by way of savings. Thus, it makes eminent sense for our policymakers to try to onshore spot bullion trading, so that domestic gold can be monetised and local buyers play an active role in setting bullion benchmark prices. Securities and Exchange Board of India’s (SEBI) new framework for investors to swap their physical gold into exchange-tradeable Electronic Gold Receipts (EGRs) is aimed at this. SEBI seems to have put in considerable effort into fleshing out operational details for EGR trading after its discussion paper last year. But past attempts at encouraging spot gold trading have been held up by structural imperfections in the gold market and the mindset of retail buyers. EGRs will need to surmount those very same barriers to take off.

To minimise costs involved in setting up a new ecosystem, SEBI has allowed EGRs to piggyback on existing stock market infrastructure. Investors have been allowed to use their stock demat and depository accounts to transact in EGRs. Depositories and clearing corporations handling shares have been tasked with facilitating EGR trades. Risk management norms detailing settlement and margining rules for EGRs are in place too. To handle the physical gold dealings inherent to EGRs, SEBI has mooted a new class of intermediaries -- vault managers -- who will register with it and take on the onus of exchanging, verifying, storing and safekeeping the deposited gold. The success of EGRs thus hinges on the willingness of gold market intermediaries to empanel as vault managers. But the Rs 50 crore minimum net worth and onerous KYC and record-keeping obligations may prove a deterrent. Only a couple of vault managers have so far registered with SEBI. Whether this enabling ecosystem will suffice to generate retail interest in EGRs also remains to be seen. In India, past attempts to monetise bullion have been tripped up by the doubtful caratage of gold held as household jewellery. To ensure standard quality, vault managers are required to only accept gold of 995 or 999 purity from DGFT-nominated importers, accredited gold refiners or empanelled assayers. The required haircuts may erect barriers in the way of retail investors seeking to exchange their household jewellery or bars for EGRs. The consumer’s reluctance to melt down her jewellery for assaying and the lack of adequate gold assaying centres are key reasons why earlier gold monetisation schemes didn’t take off.

For EGR trading to gain popularity, investors should also see significant merit in owning gold through this route, rather than through popular paperless options such as gold Exchange Traded Funds or sovereign gold bonds. Here the multiple layers of costs associated with EGRs may prove a sticking point. Apart from the brokerage and Securities Transaction Tax to be levied on every EGR transaction, owners of EGRs are expected to foot the bill for storage and delivery charges incurred by vault managers and GST, if they convert EGRs into physical gold. It is these aspects that may need ironing out by SEBI and the Centre, for the EGR initiative to strike gold.

comment COMMENT NOW