On January 10, 2022, the Securities and Exchange Board of India released a circular outlining the framework for operationalizing the Gold Exchange, which will trade the metal as Electronic Gold Receipts (EGRs).
The Circular came after SEBI approved the framework for Gold Exchange and SEBI (Vault Managers) Regulations, 2021 on September 28, 2021, which was notified by the government on December 31, 2021, and the Government of India declared “electronic gold receipts” as “securities” under Section 2(h)(iia) of the Securities Contracts (Regulation) Act 1956, paving the way for this circular providing framework for operationalization of Gold Ex.
According to the circular, the instrument for trading in the Gold Exchange/Segment is known as “Electronic Gold Receipts” (EGR), which have been notified as “securities” under Section 2(h)(iia) of the Securities Contracts (Regulation) Act, 1956.
Furthermore, the source of physical gold to be converted into EGR will be fresh gold deposits received by the vaults, according to the circular.
The stock exchange(s) that want to trade in electronic gold receipts (EGRs) can apply to SEBI for permission to do so in a new section, and the circular will take effect immediately: stated the regulator.
Depositories will provide a single interface that will be accessible to all organisations, including Vault Managers, Depositories, Stock Exchanges, and Clearing Corporations, according to the document.
The transaction is divided into three tranches by the circular, which are designated as follows:
EGR Creation in the First Tranche
Second Phase: EGR Trading on Stock Exchanges
Conversion of EGR into Physical Gold in the Third Tranche
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In the first instalment
When the vault managers receive physical gold, they must enter the required data into the shared interface and establish the EGR. The EGR will be established at the request of the depositor (or gold owner) who want to convert actual gold to EGR. He is also responsible for ensuring that no EGR is generated without accompanying real gold in its vaults. The EGR will be reflected in the beneficial owner’s demat account with the Depository Participant. To make EGR/s tradeable on the stock exchange/s, the Depository must execute the requisite steps.
The second instalment is divided into two parts.
The EGRs must be traded on a continual basis on the stock markets. In addition, on a regular basis, the Depositories will provide information about the establishment of EGR/s with the stock exchanges and clearing firms. In addition, the Clearing Corporation will settle deals on the stock exchange/s by sending EGR/s and cash to the buyer and seller of EGR/s, respectively.
In the Third Tranche
Beneficial owners of EGR who wish to get actual gold in exchange for their EGR/s must request this from the Depository in the third tranche. Such requests will be forwarded to the Vault Manager by the Depository. The Vault Manager must exchange the appropriate data with the Depository for reconciliation after releasing the gold to the beneficial owner and concurrently extinguishing such EGR/s. In response, the Depository will communicate information about the extinguished EGR/s to the stock exchange/s and clearing corporation/s, who will make the appropriate changes to the records.
Furthermore, the circular specifies the EGR’s fungibility and interoperability, which are as follows:-
Fungibility refers to the fact that the EGRs issued by the Vault Manager/s are not related to the physical gold’s unique bar reference number, i.e. gold placed against EGR1 can be delivered against conversion of EGR2 into gold (for the same contract specifications).
“Vault Manager interoperability” means that real gold placed at one location of a Vault Manager may be withdrawn from another location of the same or other Vault Manager (depending on the availability of physical gold).
The aforementioned requirements would allow the Depository to facilitate physical gold withdrawals from the buyer’s selected vault location, to the degree practicable, and potentially save money on gold withdrawal costs.
The SEBI has proposed that the New Gold Exchange operate in this manner. The highlights of the circular are mentioned above, however the whole circular can be seen on SEBI’s website. Need further clarification of udyam registration to get in touch.