Needs polishing

Despite Indian households being prodigious gold buyers, the domestic bullion market is in the elementary stages. The Centre’s idea of nurturing a gold ecosystem that facilitates transparent spot price discovery, on-shore trading and enabling India to set a global price benchmark is therefore welcome. The Securities Exchange Board of India floated a consultation paper this week to take this idea forward. While the broad contours suggested appear workable, details such as trading platforms, denominations, assaying mechanisms and costs need thrashing out.

The paper suggests that gold owners wishing to trade deposit their bullion with designated Vault Managers, who will issue Electronic Gold Receipts. These EGRs will reflect in the owner’s demat account, to be traded. Trading is proposed in lots of 50 grams, 100 grams and 1 kg. Given that the idea is to attract individuals to trade, SEBI must consider lowering the lot sizes for the initiative to take off. The paper proposes Securities Transaction Tax and GST on gold trades, apart from storage charges for Vault Managers. But for households to surrender their gold held in bank lockers or at home, charges and taxes will need to be minimal. The paper argues that instead of re-inventing the wheel, the existing ecosystem of stock exchanges, clearing corporations and depositories be used to facilitate gold trading. But the process of safely storing bullion, periodically reconciling stocks with EGRs, and ensuring fungibility between vaults will be onerous and it is moot if the paperless stock exchanges will take the effort to develop this new vertical. In any case, trading volumes in any new asset class tend to migrate towards a single exchange with high liquidity. Therefore, a specialised bullion exchange may be inevitable. While laying down detailed regulations for Vault Managers, the paper glosses over the role of assayers who will monitor and certify the quality of deposited gold. As the reluctance of gold owners to melt their holdings and lack of assaying centres have proved the biggest stumbling blocks to gold monetisation schemes, this requires fleshing out.

While the SEBI paper takes a blue-sky approach to gold trading, the Centre has already flagged off an international bullion exchange at GIFT City, facilitated a memorandum between participants and anointed the International Financial Services Centre Authority with regulatory responsibilities under the IFSCA (Bullion Exchange) Regulations, 2020. The Centre needs to clearly demarcate the areas of focus for the two parallel initiatives to nip any turf wars in the bud.

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