What is the Impact of Gold Exchange in India?

The impact of Gold Exchange in India is very much a hotly debated topic in India after the announcement in the budget speech of FY 2021-2022. To understand the positive impact of Gold Exchange in India and how it can benefit our gold industry and India in general, we need to first understand the current scenario and know about the details of the gold financial instrument proposed by the Indian Government.

 

Current Scenario in India

Presently, there is no regulated gold exchange in India as of now, India allows trading in gold futures only (March 2022) and therefore there is a no regulated market for buying and selling of gold as a financial instrument. Although Gold Futures Trading has been highly successful in India it is almost entirely cash settled.

Currently, Gold is bought and sold in Financial Markets in five different ways in India –

1.      Physical Gold

2.      Commodity Exchange (MCX Trading) – Futures and Options

3.      Gold ETF Mutual Funds

4.      Central Government Introduced Sovereign Gold Bonds

5.      DigiGold (Digital Gold)

 

Usually, Indians buy gold in physical form as a personal investment for marriages and other events, as jewellery and as an asset in case of money problems necessitating pledging of gold in return for cash in hand.

 

A step towards becoming the global price setter for India which constitutes more than 25% of global gold demand, GIFT city is facilitating India by using IIBX (Indian International Bullion Exchange), IIBX will help a fair price discovery and standardization of gold, now IIBX will help to facilitate qualified jewellers and Qualified NRI to trade if they are looking to take delivery, IIBX was launched on 29th June 2022 and by now they have on board more than 60 such jewellers.

 

If the same trajectory continues then cost of importing gold will sky rocket, making India very vulnerable to price rises thereby adversely affecting our economy.

 

Indian export of gold jewellery is also facing major challenges with countries like UAE imposing import duty on finished jewellery thereby increasing the price of jewels made in India and forcing Indian jewellers to setup manufacturing units outside India. This is negatively impacting the livelihood of local artisans and making it difficult for them to work in India.

 

Unlike other developed countries, gold consumption in India is not channelled through Financial Products and we buy gold in its physical form, with the total stock of gold in India estimated at 23,000 – 24,000 tonnes. This includes domestic household and institutions.

 

The percentage of Foreign Direct Investment (FDI) in Gold in India is also very miniscule – only about 0.32% of the total FDI into India in the Financial Year 2017-2018, even though 100% FDI is permitted under the automatic route.

 

A Gold Exchange in India can help better channelize the gold lying unused with the population and regulate the price and quality of gold in the Indian market and in the Global market.

 

India's bullion market is one of the most extensive in the world and the second largest in consumption. It holds an important position globally, though it lacks organization and a system. A bullion spot exchange is expected to handle these challenges and eradicate market inefficiencies. As a prominent market, India has always aspired to be a price setter for bullion.

 

The Proposed Gold Exchange

As per the budget speech for FY 2021-2022 made by our Financial Minister Ms Nirmala Sitharaman and discussion with Ministry of Finance post the speech, SEBI will be the regulator of the proposed gold exchange including vaulting, assaying, logistics and gold quality.

The Instrument is to be called Electronic Gold Receipt (EGR), and the gold transaction will be divided into three tranches.

 

Tranches of Gold Transaction

1.      First Tranche: Generation of Electronic Gold Receipt from Physical Gold

1.1.   Source of supply will be Fresh Deposit of gold either through imports or domestic refineries accredited by the stock exchanges, into the Vaults.

1.2.   The owner of the gold who is the depositor and wants to convert his or her gold into EGR will make sure the physical gold is delivered to the Vault Manager.

1.3.   The Vault Manager will then record all relevant information and generate the EGR.

1.4.   The EGR will be reflected in the existing demat account of the depositor or the new account created by the Depository Participant for the depositor.

1.5.   Regular Reconciliation of data between Vault Manager and Depository shall be done

1.6.   Depository will also inspect physical gold in the vaults at regular intervals.

 

2.      Second Tranche: Trading of the Electronic Gold Receipt in stock exchanges

2.1.   The stock exchange will list the EGR and allow trading as soon as it receives information on the EGR on a daily basis.

2.2.   Clearing Corporation will ensure transfer of EGR to buyer and cash to seller.

2.3.   Clearing Corporation will also inform the change in ownership of the EGR at end of trading day.

 

3.      Third Tranche: Conversion of Electronic Gold Receipt back to Physical Gold

3.1.   The owner of the EGR will surrender the EGR.

3.2.   The Vault Manager will deliver the gold to the owner.

3.3.   Then the Vault Manager will extinguish the EGR and also inform the Depository to remove the EGR entry in the DP account of the owner.

3.4.   Depository will then inform the stock exchange and clearing corporations to revise their records

 

Features of the EGR

1.      EGR will be traded under securities and all trading features for other existing securities will be made available to EGR.

2.      Perpetual life period of EGR is proposed with the owner of EGR to bear the storage charges of actual physical gold in the vaults.

3.      Please Note, Gold stored in Bank Lockers will not be made available for trading in stock exchanges.

4.      Securities Transaction Tax (STT) will be applicable on the EGR being traded on stock exchange platform.

5.      Goods and Services Tax (GST) maybe applicable when physical gold is being withdrawn from the vaults. IGST alone may be made applicable considering different resident states of buyer and seller.

6.      The Settlement cycle of EGR trading is proposed to be carried out on T+1 day.

7.      Clearing Corporation will follow the existing model for clearance, settlement and risk management as used in equities market.

8.      For KYC – Know Your Client, the existing KYC mechanism through KYC Registration Agency will be followed.

9.      For KYD – Know your Depositor, the existing mechanism for KYD in commodity derivatives market will be followed.  

10.  The Participants who are being considered are Banks, FPIs, Jewellers, Retail Participants, Bullion Dealers, Refiners etc.

 

Impact of Gold Exchange

 

The Proposed Gold Exchange will have a positive impact on the Gold Monetisation Scheme – The Gold Exchange will be a key factor in encouraging retail investors to invest all the physical gold lying in lockers to formal financial channels. The investors will have the assurance of price transparency at the time of selling and buying of EGRs.

Banks can come up with innovative gold linked financial products through the Gold Exchange. The entire financial market will get a shot in the arm with the success of the Gold Exchange in India.

 All the Participants including Banks, digital gold providers in the Gold Exchange will be connected on a digital platform that gives much better clarity and accountability while trading in EGRs. They are –

·         Exchange Traders

·         Banks

·         Jewellers and Manufacturers (Large and Small)

·         Investors

·         Vaulting agencies

·         Logistics Agencies

·         Assayers

·         Insurance Companies

·         Depositories

·         Refiners

·         Registrar

 

Apart from gaining confidence of Indians to invest more in the Gold Exchange, there will also be another very big impact - of creating jobs for almost 3 lakh people directly and 1 lakh people indirectly, because of the proposed process of creation of EGRs, its trading and conversion back to physical gold. More jobs will boost the economy and will also increase the spending capacity for Indians.

Setting an India Gold Price – Price of spot trades executed during an agreed time window can be used in the automatic generation of settlement price which can then be used as a reference price. This will not only provide a consistency and uniformity in pricing of gold but will also help India make its impact on the global price of gold since India is the second largest buyer of gold in the world. 

With better transparency and flow of gold through the Gold Exchange, instead of physical gold lying in lockers, there will be better recycling of existing gold within Indian itself thereby reducing the need for fresh gold imports for India. Reduction in gold imports and increased local availability of gold will automatically improve the Indian economy and reduce additional costs incurred by Industries dependant on gold. It will also be of huge benefit to the Indian Gold Jewellery Industry that export finished gold products; they can successfully compete with developed nations who impose import duties on finished gold products. The local artisans in gold jewellery will also be encouraged more because of better business and job opportunities in India itself.

 

Snapshot of Impact of Gold Exchange:

·         Marketplace that is regulated and transparent.

·         A unified and common Buyer-Seller platform that is more efficient.

·         Better Linkages - Banks, Collection and Purity Testing Centres (CPTCs) and Investors will be linked together.

·         Assured Quality of Gold at all stages of gold value chain.

·         Transaction Traceability.

·         Promote the sale of physical gold through the Exchange.

·         Enable Gold (Metal) Loan through the Exchange.

·         Better integration with financial markets.

·         Increased gold recycling.

·         Better Governance in terms of Responsible Gold that does not contribute to conflicts and human rights abuse, misuse of money by way of funding terrorists or laundering.

·         Improved standards of Risk Management, Clearance and Settlement.

·         Creating huge number of employment opportunities in India.

·         Global Acceptance and Recognition of India Gold Price.

 

Factors	Gold Jewellery Purchase Schemes	Commodity Exchange Trading - MCX Trading	Gold ETF Mutual Funds	Sovereign Gold Bonds	DigiGold	Proposed Gold Exchange
Returns	Based on Future Gold Price in Market	Based on Future Gold Price in Market	Proportional to returns on Gold	Proportional to returns on Gold AND Fixed Return %	Proportional to returns on Gold AND Fixed Return %	Based on Future Gold Price in Market
Expenses	Making charges, Wastage Charges	Brokerage Fees	Brokerage Fees and Fund Management Charges of AMC	Nil	Fixed Charges per unit	Vault Storage Charges and Brokerage Fees
Liquidity	Very Liquid	Upon Expiry of Contract and also during the Contract	Easily Redeemable	Redeemable only after 8 Years	Easy Liquidity	Settlement Day is proposed as T+1 day.
Tax Efficiency	Capital Gains Tax applicable when sold.	Capital Gains Tax applicable.	Capital Gains Tax applicable when sold.	No Tax on Maturity	Capital Gains Tax applicable when sold.	GST plus Securities Transaction Tax

 

Conclusion:

The growing consumption of gold in India is more likely to impact the price of the bullion in the global market & cause price fluctuations.

In the future, India is likely to become the key player for determining the gold price movements & directions

The IIBX, even if not in the short term, will definitely create a huge opportunity for Indian market in the long run.