gold investments - Adamant Capital Fund

Investments in gold can be made in various forms, including physical gold, Sovereign Gold Bonds, Gold ETFs, and the latest option: Gold EGR (Electronic Gold Receipts). While there is a lot of literature on other forms of investment, not much has been written about Gold EGR.

Therefore, let us delve into what this mode of investment means for investors.

India’s annual demand for gold has been around 900–1,000 tonnes. It is one of the largest importers of gold from the world market; however, it does not have a liquid spot market price for price discovery.

The new framework by SEBI (Securities and Exchange Board of India) lays down rules and regulations to facilitate efficient price discovery for the yellow metal. SEBI has proposed the introduction of a gold exchange to improve price discovery for gold.

1.What is the new framework?

According to the SEBI framework, investors can trade in Electronic Gold Receipts (EGRs) on existing stock exchanges as well as on the proposed gold exchange.

How does it work?

EGRs will be issued against physical gold
Investor can deposit physical gold in vaults and get EGR issued against it
Vaults and storage will be maintained by vault managers registered with SEBI
The vault manager and SEBI registered depositories will facilitate the issuance of EGRs against the physical gold
The EGRs will be a denomination such as 1kg, 100gm, 50gm, and they will have perpetual validity

2. What is the role of the Gold Exchange proposed by the regulator?

The gold exchange would serve as a national platform for buying and selling Electronic Gold Receipts (EGRs) backed by standardized gold in India. It aims to establish a national pricing structure for gold. Additionally, the proposed gold exchange is expected to offer a host of benefits to participants in the gold market and the entire ecosystem.

Efficient and transparent price discovery
Liquidity in the investments, and assurance in the quality of gold

However, SEBI has also permitted existing and new stock exchanges to allow trading in Electronic Gold Receipts (EGRs) under separate segments and to determine the gold denominations that will be traded.

3) Who will bear the charges for storing EGRs?

Holders of Electronic Gold Receipts (EGRs) will bear the storage charges. This may make EGRs more expensive than keeping gold at home; however, it will reduce security risks. Additionally, one can deposit gold in New Delhi and convert it into EGRs, while receiving an equivalent amount of gold in Mumbai. One EGR can be interchanged for another.

4) Taxation of the EGRs

EGRs will be taxed as securities under the Securities Contract Act and will be subject to Securities Transaction Tax, according to the consultation paper by the regulator, SEBI. Goods and Services Tax (GST) will be levied only on investors who wish to convert their EGRs into physical gold. This gives EGRs an advantage over physical gold or even digital gold, which are subject to a 3% GST.

5) What is there for investors on the table

Investors in India will now have a plethora of options for investing in gold, including physical gold, Gold ETFs, gold fund of funds, Sovereign Gold Bonds (SGBs), and digital gold.

The following table depicts the advantages and disadvantages of gold SGRs over other available options

In totality, EGRs will be beneficial to the investors in the following context

One nation one price
Marketplace for physical gold backed by the power of technology
EGRs will be traded on exchanges just like other stocks and securities that are traded on the exchanges

(The author is Deputy Vice President, Research, Non-Agri Commodities & Currencies)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)