All You Need to Know About Electronic Gold Receipts

The market regulator SEBI had given its nod for setting up a gold exchange wherein the yellow metal will be traded in the form of an Electronic Gold Receipt (EGR). SEBI had then said that any recognised stock exchange, existing as well as new, can launch trading in EGRs in a separate segment. With the approval of SEBI, the denomination for trading EGRs and converting an EGR into gold can be decided by the stock exchanges.

The Bombay Stock Exchange (BSE) received in-principle approval from SEBI in February 2022, after which the exchange conducted several mock trading in the test environment for exchange members to facilitate trading in EGRs. After these test results are shared with the regulators, and they are satisfied with the process flow, the final approval to launch the EGRs will be given to BSE.

Recently, the Bombay Stock Exchange (BSE), on Monday, October 24, 2022, announced that it had received final approval from SEBI to launch the Electronic Gold Receipts (EGRs) in full- fledge on its platform. The exchange has introduced two new products of 995 and 999 purity during the Muhurat trading on Diwali, and the trading will be in multiples of 1 gram and deliveries in multiples of 10 grams and 100 grams of gold.

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What are Electronic Gold Receipts (EGRs)?

Electronic Gold Receipts or EGR is an instrument representing gold in electronic and Demat form and are notified as securities, with trading, clearing and settlement features. The gold exchange will facilitate the trading of gold in the form of EGRs. In other words, EGR is an instrument symbolising the real gold stored in registered vaults. EGRs will be declared securities by the government in accordance with the Securities Contracts (Regulation) Act of 1956.

Investors can convert their physical gold into Electronic Gold Receipts. The EGR holder can hold the receipts for as long as they intend since it will have perpetual validity. An EGR holder, at his discretion, can also withdraw the underlying gold from the vaults and convert it back to physical gold by surrendering the EGRs to the respective exchange. The Clearing Corporation will settle the trades executed on stock exchanges by way of transferring EGRs and funds to the respective buyer and seller.

The EGRs represent gold in a fungible manner, and the spot gold would be traded through these EGRs. What matters, in this case, is that the trading, clearing and settlement features similar to other securities like equities, futures and options that are currently available in India would also be available for EGRs. According to SEBI, a thriving gold ecosystem will be created in India by the gold exchange, which includes the full ecosystem of trading of EGR and physical delivery of gold.

How do Electronic Gold Receipts (EGRs) work?

EGRs are a way of getting people to not hoard gold physically by creating an exchange that provides transparent pricing and liquidity (to cash or back to gold). BSE said the buyer could convert the physical gold into an EGR by depositing the yellow metal at the designated delivery centre.

According to BSE, the buyer could create an EGR by depositing physical gold at the approved delivery location. Anyone who wants to construct an EGR must first submit a request to deposit gold with a vault manager, according to the procedure laid out by SEBI. The manager will examine the gold's quality to ensure it complies with requirements, check all proper documents, and accept deposits. After the gold is sourced, a depository receipt is created for trade on the BSE.

SEBI has stated that Vault Managers will be responsible for storing and safekeeping gold deposits, creating EGRs, withdrawing gold, grievance redressal, and periodic reconciliation of physical gold with depository records.

However, the Vault Managers should have the following features:

• It should be a corporate body incorporated in India

• It should have a net worth of at least Rs 50 crore.

• The Vault Manager will be registered and regulated as a SEBI intermediary for providing vaulting services meant for gold deposited to create EGRs.

Moreover, the Vault managers will also have to maintain documents detailing gold transfer, withdrawal, purity of the deposited gold and storage. As per SEBI's guidelines, they have to maintain all records for a minimum of 5 years.

To lower the costs associated with the withdrawal of gold from the vaults, SEBI has mentioned that EGRs will be made 'fungible', meaning the holders can convert the EGR issued by one vault manager with any other vault manager. And 'interoperability between vault managers' will be allowed, which means gold deposited at one location and with one vault manager can be withdrawn from a different location of the same or different vault manager, subject to the availability of the physical gold. This will reduce the cost for buyers.

SEBI will regulate the registered vault managers, who will play an intermediary in providing vaulting services meant for gold deposited to create EGRs. The trading will be done in 3 phases: Conversion from physical gold to EGRs, trading of EGRs, and again conversion of EGR back to physical gold.

Using your Demat account, you can buy an EGR in the same process you buy a stock on BSE. The exchange stated it plans to launch different variants and denominations, from 1 gram to 1 kg, so that investors could buy them according to their budget. For reference, Sovereign Gold Bonds (SGBs) are also available for a minimum value of 1 gram. Clearing and settlement of EGRs will entail a multi-level interface of banks, vaults, importers, exporters, retailers, depositories, DPs, and others. EGR clearing and settlement will be guaranteed by the clearing corporation, like in the case of equities and, futures & options.

How EGRs are beneficial for investors?

Due to the fact that EGRs will serve all market participants, buyers and sellers on the exchange will include both individual investors and commercial participants from all points along the value chain, such as importers, banks, refiners, bullion traders, jewellery manufacturers, and retailers.

EGRs, provide investors with an electronic, efficient and transparent platform for bullion trading. It offers efficient price discovery, standardisation of gold and assurance of the quality of gold. Investors in gold will have another investment option with the introduction of Electronic Gold Receipts. In India, gold futures and options are traded, but spot gold trading would present a fresh alternative. Spot trading entails purchasing and selling assets at the spot price, also known as the live market price.

How will EGRs be taxed?

EGRs will be taxed as security under the Securities Contract Act and will be subject to Securities Transaction Tax as per the consultation paper by the SEBI. Goods and services tax will be levied only on investors who wish to convert their EGRs to physical gold. This gives EGRs a hedge over physical gold or even digital gold, which are subject to 3% GST.

Similar to Gold ETFs, EGRs will attract a capital gains tax of 20% if the investment is held for more than 3 years. In this case, the investor can avail of indexation benefits, which allows for the calculation of tax net of the prescribed rate of inflation.

However, do note that the storage or vaulting charges, as levied by the Vault Managers, shall be paid by the beneficial owner of the EGR at the end of the trading day, whereas the Delivery Charges shall be borne by the beneficial owner of the EGR opting for withdrawal of the physical gold. Although this can make the EGRs more expensive than keeping gold at home, it will lower security risks. Moreover, one can deposit gold in one state and convert it into EGRs but receive an equivalent amount of gold in a different state.

To conclude...

The global economy is affected by rising geopolitical tensions and uncertainty in the macroeconomic environment with soaring inflation and interest rates. It is compelling to own gold in your portfolio since it is considered a store of value to sustain uncertain times and hedge against inflation. Given the current headwinds, it makes sense to allocate strategically to gold in order to protect against the risk of near-term volatility and the onset of a global recession in 2023, as predicted by experts.

Although India is the second largest consumer of gold, it has traditionally been a price taker and not a price setter. Normally, gold prices in India are still set based on international prices adjusted for costs. BSE is the first exchange in India to launch Electronic Gold Receipts (EGR), which infuses transparency in gold spot transactions and enables India to emerge as the price setter and would eliminate existing market inefficiencies.

Keep in mind that gold as an asset class should only account for a modest portion of your total portfolio and prevent your portfolio from slumping. You may consider investing in gold 'the smart way' through Gold ETFs, Gold savings funds, or Sovereign Gold Bonds. You can also consider investing through Electronic Gold Receipts (EGRs), which are now available to trade under the gold exchange ecosystem on BSE.

Warm Regards,
Mitali Dhoke
Research Analyst