Electronic Gold Receipts (EGRs): Its Functionality In Indian Gold Exchange

Indian gold market is now ready to experience a gold exchange in the country, which is going to be implemented to trade the physical gold in shares after the union government approves the same. To run the ecosystem, the Securities and Exchange Board of India (SEBI) has recently authorized the introduction of a gold exchange where the metal will be traded in Electronic Gold Receipts (EGRs). The BSE is now ready to be the pioneer of the technology and the system to introduce it in India.

Pricing mechanism

So, what is an EGR and how will it act to create a gold pricing mechanism? An EGR will be issued in exchange for physical gold, which will be similar to a company's equity shares for trading. EGRs will be notified as securities, and will certainly avail of all the benefits as any other securities. The EGRs are expected to be a bridge in integrating spot gold trade with the derivatives markets in the Indian domestic periphery.

We are aware of the fact that India is the second-largest gold importer globally, hence, Indian gold rates are dependent on international gold prices. Gold is a dollar-dominated asset class and is inversely related to the US dollar currency index. After the implementation of the gold stock exchange and EGR system, India can take part to fix the gold rates in the country rather than depending on global rates. The EGR system will help to create a uniform transparent domestic spot price discovery price structure of gold.

At present, Indian investors can invest in gold derivatives and Gold ETFs, but not in spot exchanges for physical trade in gold. After the complete implementation of the gold exchange and the EGR mechanism, it will be an easy job.

Conversion to physical gold

An investor will hold the EGRs in a Demat form and it can be converted into physical gold as required, after surrendering the EGR. To understand the EGR system, one can divide it into 3 possible segments, - conversion from physical gold to EGRs, trading of EGRs, and then conversion of EGR to physical gold. In gold exchange, there will be a similar concept like depositary participant (DP) who will work as a gold vault manager. The vault manager is required to have a net worth of at least Rs. 50 crore. So, investing in gold virtually will be far better organized and systematic for traders. The BSE might launch EGRs of 1 kg and 100 gm denominations, and later in 50 gm, 10 gm, and 5 gm denominations. The BSE will also be implementing Vault Service Providers (VSPs) as per SEBI guidelines.

The EGR will also create a transparent platform for bullion trading, along with contributing to the Gold Monetization Scheme (GMS), gold bonds, and gold deposits ecosystem, apart from assuring the quality of the gold.