The Securities Exchange Board of India (“SEBI”) has, vide its circular dated January 10, 2022 (“Circular”), notified the framework for gold exchange in India, which shall come into force with immediate effect.
The Government of India vide Gazette notification dated December 24, 2021, has declared “electronic gold receipts” (“EGRs”) as ‘securities’ under Section 2(h)(iia) of the Securities Contracts (Regulation) Act 1956. Further, SEBI (Vault Managers) Regulations, 2021 have been notified vide Gazette notification dated December 31, 2021. These have paved the way for operationalizing of the Gold Exchange.
Stock exchange(s) desirous of trading in EGRs are required to apply to SEBI for approval for the trading of EGRs in the new segment.
Annexure 1 of the Circular lists the framework for gold exchanges in India. A few salient features of the same, inter alia, are as follows:
1) The instrument for trading in the gold exchange/ segment shall be EGRs.
2) New and existing recognized stock exchanges may launch and deal in EGRs, in a new segment.
3) Structure of the transactions: The entire transaction has been divided into following three tranches:
a) First Tranche: Creation of EGR
i) A common interface will be developed by depositories, which will be made accessible to all the entities i.e., vault managers, depositories, stock exchanges and clearing corporations.
ii) The supply of the physical gold, to be converted into EGR, shall be the fresh deposit of gold, coming into the vaults, either through imports or through stock exchange(s) accredited domestic refineries. Physical gold shall be converted into EGR as per the specified criteria.
iii) The vault manager on receipt of physical gold shall record the relevant information in the common interface and create the EGR. The EGR shall be created at the behest of the depositor (or owner of the gold) intending to convert physical gold into EGR.
iv) The vault manager shall ensure that no EGR is created without the presence of corresponding physical gold in its vaults.
v) The EGR shall reflect in the Demat account of the beneficial owner maintained with the depository participant.
b) Second Tranche: Trading of EGR on stock exchange(s)
i) The stock exchanges shall allow trading of the EGR’s on continuous basis and the depositories shall share information pertaining to the creation of EGR/s, with the stock exchanges and clearing corporations on a periodic basis.
ii) The Clearing Corporation shall settle the trades executed on the stock exchange(s), by way of transferring EGRs and cash to the buyer and seller of EGRs, respectively.
c) Third Tranche: Conversion of EGR into Physical Gold
i) Beneficial owner of EGR intending to obtain physical gold against the EGRs shall request the depository for the same. The depository, in turn shall forward such request to the vault Manager. The vault manager after delivering the gold to the beneficial owner and simultaneously extinguishing such EGRs, shall share the required data with the Depository for reconciliation.
ii) The depository, in turn, shall send the information about the extinguished EGRs, to the stock exchange(s) and clearing corporation(s) to carry out necessary revision in the records.
4) EGRs shall have same trading features as available to “securities” defined under SCRA, 1956.
5) Fungibility and Interoperability between the vault managers:
a) Fungibility means, the EGRs created by the vault manager(s), shall not be linked with the unique bar reference number of the physical gold, i.e., gold deposited against EGR1 can be delivered against conversion of EGR2 into gold (for the same contract specifications).
b) Inter-operability between vault managers means the physical gold deposited at one location of a vault manager, can be withdrawn from different location of same or different vault manager (depending on the availability of physical gold).
6) The storage and withdrawal charges shall be levied by the vault managers and be collected by the depository from the beneficial owner of EGR’s, for onward payment to the vault managers
7) Clearing Corporations shall empanel / accredit assaying agencies for checking the purity of gold, if required by the beneficial owner of the EGR at the time of withdrawal of gold from the vaults.
Please find a copy of the Circular here.
This update has been contributed by Smriti Tripathi (Associate).
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