BSE has received approval for electronic gold receipts, what it means

The Bombay Stock Exchange (BSE) has announced on Monday that it had received approval from SEBI to launch the Electronic Gold Receipts (EGRs) on its platform. The EGRs actually represent gold in a fungible manner and the spot gold would actually be traded through these EGRs. When EGRs were permitted, SEBI has said that recognized exchanges would be allowed to launch this product on their platform. What is more important 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.

It may be recollected that the BSE had already received in-principle approval from SEBI for the launch of Electronic Gold Receipts (EGRs) back in February 2022. Subsequent to that approval, the BSE had conducted several mock trading sessions in the test environment for exchange members to facilitate trading in EGRs. After these test results were shared with the regulators and the regulators were satisfied with the process flow, the final approval to launch the EGRs was given to BSE. Now BSE can launch full-fledged EGRs on its platform.

The whole idea is to facilitate the creation of a spot gold exchange in India, wherein gold could be traded, cleared and settled through the use of EGRs or electronic gold receipts. Currently, it is possible to trade gold futures on the MCX and NCDEX while it is also possible to trade the gold exchange traded funds (ETFs) on the stock exchange platform. However, neither offers a direct position in spot gold. The spot gold exchange will provide the forum for trading in spot gold, simplified with the use of electronic gold receipts (EGRs). This is in line with several countries that have a robust spot market trading in gold.

The electronic gold receipts (EGRs) would be notified as securities, with trading, clearing and settlement features similar to other securities currently available in India. The participants in EGRs will be from across the spectrum. It would include individual investors, commercial participants as well as key players along the gold value chain like banks, importers, refiners, traders, retailers, manufacturers etc, who have an underlying exposure to gold and may be looking to hedge their risk or for strategic buying in line with their business needs. To begin with institutional investors are yet to be permitted into trading in EGRs.

While BSE has not committed any specific date, BSE has announced that they plan to launch the official trading in electronic gold receipts (EGRs) very soon. India is the second largest consumer of gold after China but India has traditionally been a price taker and not a price setter. Normally, gold prices in India are still set based on the international prices adjusted for costs. The EGRs will ensure that India is also able to dictate the pricing of gold in a more meaningful way. After all, EGR platform being a security trading platform, carries the counter guarantee of the clearing corporation. This will also lead to better price discovery.

But the gold EGRs is likely to have many stake holders in the process and they have to brought into the gold ecosystem. For instance, the ecosystem requires the active participation of depositaries (to hold EGRs in custody), vault managers (to hold gold) and traders and jewellers to participate in the market for price discovery. The risk will be much lower, being a guaranteed platform and a transparent mechanism for trading. India consumes 900 tonnes of gold annually, so this can be a huge market. Hopefully, the product should pick up in a big way.