The exchange offered by Sebi is worth gold
India has a demand for 800-900 tonnes of gold per year. It is a large importer, but it does not have a large liquid spot market for price discovery. The Securities and Exchange Board of India (Sebi) has fleshed out a gold exchange proposal. Mint takes a look.
How will gold be traded under the new framework?
Investors can trade electronic gold receipts (EGRs) on existing exchanges as well as the proposed gold exchange, according to the Sebi executive. EGRs will be issued against physical gold. An investor can deposit physical gold in vaults and get EGR against it. Safes and storage will be maintained by safe managers registered by Sebi. The Vault Manager and Sebi Registered Custodians will facilitate the issuance of EGRs against physical gold. The EGRs will be of names such as 1 kg, 100 g and 50 g. The EGRs will have perpetual validity.
How does the gold exchange work?
The gold exchange is said to be a national platform for buying and selling EGR with underlying standardized gold in India, according to Sebi. It would also create a national price structure for gold. The gold exchange is expected to offer a multitude of benefits to participants in the value chain as well as to the entire gold market ecosystem, such as efficient and transparent price discovery, liquidity investment and quality assurance of gold. But the existing exchanges as well as the new exchanges have also been allowed to allow trading of EGR under separate segments and also to decide which gold denominations will be traded.
Who will bear the costs of storing the EGR?
EGR holders will bear the costs of storage, according to the Sebi consultation document. This can make EGRs more expensive than keeping gold at home, but will reduce safety risks. In addition, one can deposit gold in New Delhi and convert it to EGR but receive an equivalent amount of gold in Mumbai. One EGR can be replaced by another.
How will EGR be taxed?
EGRs will be treated as collateral under the Securities Contract Act and will be subject to securities transaction tax, in accordance with the consultation document. The Goods and Services Tax will only be levied on investors who wish to convert their EGR into physical gold. This gives EGR an advantage over physical gold or even digital gold, which is subject to a 3% GST. Some chartered accountants are of the opinion that EGR will be eligible for long-term capital gains after a holding period of one year against 3 years for gold or even gold ETFs.
What are the advantages and disadvantages?
Indian investors have a plethora of options for investing in gold, including the physical gold market, gold ETFs, gold funds of funds, gold sovereign bonds (SGBs) and digital gold. Each has its own advantages and disadvantages. The gold exchange and gold EGRs score potentially high scores in terms of liquidity, safety and tax efficiency, making them a serious contender for those considering gold in the short to medium term. . SGBs, however, retain an advantage for long-term retail investors due to the 2.5% annual interest they carry.
Never miss a story! Stay connected and informed with Mint. Download our app now !!