Background:
The Indian marketplace exhibits a pronounced predilection for gold, ostensibly predicated upon consumer perceptions of its investment and aesthetic utility. Paradoxically, this proclivity exacerbates the nation's current account deficit. To ameliorate this economic imbalance, the Federation of Indian Chambers of Commerce and Industry (FICCI) and the World Gold Council (WGC) jointly commissioned the Bureau of Research on Industry & Economic Fundamentals (BRIEF) to undertake a comprehensive nationwide consumer survey. In addition to benchmarking against international exemplars, the survey delved into domestic consumer behaviour pertaining to gold acquisition, consumption patterns, accumulation, and supply chain logistics.

The empirical data unveiled a robust and unwavering demand for gold, impervious to fluctuations in the political, fiscal, and macroeconomic environments. A preponderance of respondents evinced an inflexible determination to procure gold irrespective of prevailing circumstances.

Significantly, 60% of participants expressed a willingness to relinquish their gold holdings to financial institutions in exchange for interest, suggesting a potential paradigm shift towards a more sophisticated financial approach to gold ownership.

Introduction
Electronic Gold Bond Receipts (EGRs) represent a pivotal innovation within India's financial landscape, designed to revolutionize gold investment. The instrument's inception was a direct response to the inherent challenges posed by physical gold ownership, such as its susceptibility to theft, storage complexities, and lack of transparency. By offering a digital, easily tradable, and secure alternative, EGRs aim to usher in a new era of formalized and efficient gold investment. This transformation is anticipated to curtail the prevalence of unregulated gold trade, thereby bolstering the formal economy and enhancing market transparency.

The regulatory framework underpinning EGRs is a complex interplay of legislative provisions. The Reserve Bank of India Act provides the overarching regulatory authority, ensuring adherence to stringent financial standards. Simultaneously, the Securities Contracts (Regulation) Act classifies EGRs as securities, subjecting them to disclosure requirements and trading regulations designed to safeguard investor interests and maintain market integrity. The Companies Act, while indirectly applicable, imposes corporate governance and disclosure obligations on entities involved in EGRs issuance and trading.

Furthermore, the Foreign Exchange Management Act governs cross-border transactions, including those related to gold, ensuring compliance with India's foreign exchange regulations. Lastly, the Gold Monetization Scheme provides a synergistic framework for mobilizing idle gold and fostering the growth of the gold bond market, of which EGRs are a cornerstone. This intricate regulatory tapestry collectively establishes a robust foundation for the EGR market, balancing investor protection with market efficiency.

SEBI'S Regulatory Actions:

Framework For Spot Exchange (January 2022): SEBI established a framework for a dedicated spot exchange where physical gold will be traded electronically through EGRs. This exchange is expected to facilitate a price discovery mechanism for spot gold trading. EGRs will function similarly to existing securities traded in India, with trading, clearing, and settlement functionalities.

Regulation Of Vault Managers (January 2022): SEBI issued the SEBI (Vault Managers) Regulations, mandating the registration and regulation of vault managers as SEBI intermediaries. Vault managers are responsible for providing secure storage services for gold deposited to create EGRs.

Trading Features of EGRs (February 2022): SEBI published a circular outlining the trading features of the EGR segment. These circular details aspects such as trading hours, processes for conducting call auctions, and other relevant procedures for trading EGRs.

Standard Operating Guidelines (February 2022): To streamline compliance for market participants and ensure effective implementation of the regulations, SEBI issued Standard Operating Guidelines under relevant provisions of the SCRA and SEBI (Depositories and Participants) Regulations.

Transaction Framework (March 2022): SEBI established a framework for EGR transactions in three distinct stages

• Tranche 1: Conversion of physical gold into EGRs.
• Tranche 2: Trading of EGRs on stock exchanges.
• Tranche 3: Conversion of EGRs back into physical gold.

 

Regulatory Framework Of Electronic Gold Receipts In India:

• Securities Contracts (Regulation) Act, 1956:
  • Classification as Securities: EGRs are designated as securities under this statute, thereby subjecting them to the rigorous oversight and investor protection protocols that apply to other securities such as stocks and bonds. This classification ensures EGRs are governed by stringent regulatory mechanisms.
• Securities and Exchange Board of India (SEBI):
  • Regulatory Authority: SEBI, the principal regulatory entity for securities markets in India, administers the issuance, trading, and redemption of EGRs. SEBI's regulations mandate transparency, fairness, and robust investor protection within the EGR market.
  • Gold Exchanges: SEBI oversees designated gold exchanges where EGRs are traded. These exchanges operate under strict regulatory guidelines to uphold market integrity and prevent fraudulent activities.
• Clearing Corporation:
  • Transaction Clearing: A Clearing Corporation facilitates the seamless and secure transfer of EGRs and funds between transacting parties. By managing these transactions electronically, the Clearing Corporation mitigates risks associated with the physical movement of gold.
  • Risk Management: The Clearing Corporation implements comprehensive risk management protocols to protect the interests of all market participants, ensuring efficient and secure transaction settlements.

Registered Vaults:

• Gold Storage: EGRs correspond to a specified quantity of physical gold stored in registered vaults. These vaults are sanctioned and supervised by regulatory authorities to guarantee the safety and authenticity of the stored gold.
• Audit and Compliance: Regular audits and compliance inspections are conducted to verify the quantity and quality of gold held within these vaults, thereby maintaining the credibility of the EGR system.

Conversion and Redemption:

• Physical Gold to EGR: Investors can convert their physical gold into EGRs, thereby facilitating easier trading and enhanced liquidity. This conversion process is regulated to ensure accuracy and transparency.
• EGR to Physical Gold: EGR holders are entitled to redeem their receipts for physical gold from the registered vaults. This redemption process is designed to be straightforward and secure, providing investors with the assurance of converting their electronic holdings back into tangible assets.

Investor Protection:

• Transparency and Disclosure: Regulatory mandates impose extensive disclosure requirements on all EGR market participants, ensuring that investors have access to all pertinent information.
• Grievance Redressal: An organized grievance redressal mechanism is in place to resolve any issues or disputes that may arise, thereby providing investors with a reliable method for addressing concerns.

Technological Infrastructure:

• Electronic Platforms: The trading of EGRs is facilitated through sophisticated electronic platforms that offer real-time trading, settlement, and reporting functionalities. These platforms are designed to deliver a seamless and user-friendly experience for investors.
• Cybersecurity: Advanced cybersecurity measures are implemented to safeguard the integrity of electronic transactions and the data of market participants, ensuring a secure trading environment.

INTERNATIONAL FRAMEWORK OF ELECTRONIC GOLD RECEIPTS:
Electronic Gold Receipts are a digital form of gold ownership that allows investors to buy and trade gold in a dematerialized format. Electronic Gold Receipts provide a transparent, efficient, and secure means of trading gold. However, the regulatory framework governing Electronic Gold Receipts may vary. Electronic Gold Receipts are necessitated under international regulations and guidelines. For the same, the Basel Committee on Banking Supervision's Basel III framework impacts the concept of Electronic Gold Receipts putting out a core essence in capital requirements for banks holding gold-related assets.

Further, the International Organization of Securities Commissions (IOSCO) gives the principles and standards for regulating the security markets including gold as a commodity. Additionally, the FATF, being the Financial Action Task Force, is also one of the crucial elements in regulating the Electronic Gold Receipts as its guidelines aid in preventing illicit activities through the gold market.

It has been duly observed that the Electronic Gold Receipts Regulations vary in major economies, for instance in the United States the Electronic Gold Receipts are being regulated by the Securities and Exchange Commission, and Commodity Futures Trading Commission. Both its regulations for electronic trading and disclosures combined with oversight of commodities ensure a comprehensive approach for Electronic Gold Receipts.

In the European Union, Electronic Gold Receipts are governed by directives and regulations such as the Markets in Financial Instruments Directive II and the Central Securities Depositories Regulation. They majorly concrete upon the market transparency, investor protection, and the Electronic Gold Receipts actions of financial markets across the member states. In China, Electronic Gold Receipts are characterized by state control and a focus on maintaining market stability. These are overseen by the People's Bank of China and the China Securities Regulatory Commission.

Moreover, the International Monetary Fund (IMF) and the World Bank equally play crucial roles in the standardization of the Electronic Gold Receipts regulations. They assist in order to provide guidelines, technical assistance, and policy recommendations to harmonize regulatory practices across the jurisdictions. Such organizations foster international cooperation and facilitate knowledge exchange, ensuring that Electronic Gold Receipts markets operate efficiently and transparently on a global scale. In India, the Electronic Gold Receipts are conducted as securities and are subject to capital gains tax upon transfer. The tax rates are dependent on the holding period, with short-term gains taxed at the individual's applicable income tax rate and long-term gains subject to a concessional rate.

International Gold Exchanges:

With over 90% of the world's gold trading volume, the three main gold trading centres are the Shanghai Gold Exchange (SGE), the US futures market, and the London OTC market. In addition to these main markets, there are many smaller secondary market hubs all around the globe that include both over-the-counter and exchange traded venues.

1. The OTC Market in London: With over 70% of the world's notional trading volume, the London OTC market has long been the hub of global gold trading. Global traders are drawn to it, and it establishes the twice-daily benchmark for the gold market known as the LBMA Gold Price. The trading of 400-ounce "Good Delivery" bars, which are kept in the vaults of the Bank of England and the London Precious Metals Clearing Limited (LPMCL), is exclusive to London. London, sometimes known as the "terminal market," has a distinctive vaulting system that is distinguished by a strict chain of custody and huge gold holdings.
    
2. The COMEX US Futures Market: Even though the physical gold market is dominated by London, the CME Group-run COMEX derivatives exchange is becoming more and more important for price discovery. The most traded contract on COMEX is the "active month" contract, which acts as a stand-in for the spot price. Through the actively traded Exchange for Physical (EFP) market, the market maintains a strong connectivity to the physical markets, even if only a small fraction of contracts results in physical delivery into COMEX vaults.
    
3. The Market in China (SGE): China's growing influence in the gold market is reflected in the swift rise in prominence of the Shanghai Gold Exchange (SGE), which was founded in 2002 under the supervision of the People's Bank of China. SGE has grown to be the world's largest physical gold exchange in less than 20 years. China is the world's greatest producer of gold, accounting for 11% of the world's total production.
    
4. Centres Of Secondary Markets: In the global gold market, secondary market hubs like Singapore, Hong Kong, Japan, India, and Dubai are crucial. Despite not achieving the same levels of liquidity as the primary markets, these markets are home to exchanges that provide a range of listed contracts or spot trading facilities.

Taxation And Accounting Treatment Of Electronic Gold Receipts:

Electronic Gold Receipts is being subjected to international accounting standards such as the International Financial Reporting Standards and the Generally Accepted Accounting Principles. Under these mechanisms being followed the Electronic Gold Receipts are briefly classified as financial instruments and are subject to fair value measurement, and disclosure requirements. Such guidelines ensure consistency and transparency in financial reporting.

It is categorically observed that the Electronic Gold Receipts tax treatment differs by humongous levels across the jurisdictions. For instance, while India and the USA conduct the Electronic Gold Receipts as securities and collectibles respectively, the other countries may have specific rules for commodity-linked securities. Such differences foster strategic and careful planning which complies with the Electronic Gold Receipts holders who are operating in multiple jurisdictions.

Therefore, as Electronic Gold Receipts continue to gain transactions, a harmonized approach to regulation and taxation has been held essential to support their growth and stability in the global financial system.

Conclusion
Electronic Gold Bond Receipts (EGBs) are a powerful tool in the toolbox of economic policy, with the ability to stimulate growth through a combination of techniques. Through the provision of a safe, easy-to-access, and lucrative gold investment option, EGBs efficiently direct excess capital from inactive assets into the economically active domains. This mechanism, which is also known as financial intermediation, is essential for promoting entrepreneurship, increasing aggregate demand, and encouraging investment.

One noteworthy aspect of EGBs is their ability to decrease the need for actual gold. They reduce the need for importing gold by offering a digital counterpart, protecting foreign exchange reserves in the process. This accumulation of foreign cash can be strategically used to support technological advancements, infrastructure, and other development priorities. Furthermore, the removal of the storage and security issues related to physical gold boosts investor confidence, initiating a positive saves and investment cycle.

EGBs moderate inflationary pressures, which helps to maintain price stability from a macroeconomic standpoint. Gold investments typically absorb excess liquidity in the economy as a hedge against inflation, preventing it from driving price increases. EGBs have the potential to mitigate inflationary expectations and stabilize inflation at target levels by offering a competitive substitute for stockpiling gold.

To sum up, electronic gold bond receipts are a versatile instrument for economic growth. Through promoting price stability, preserving foreign exchange, and enabling financial intermediation, EGBs can serve as a catalyst for sustained and inclusive growth. As the Indian economy navigates the complexities of the global landscape, the judicious deployment of EGBs can be instrumental in achieving its long-term development objectives.

References:

1. Josias N. Dewey, Blockchain & Cryptocurrency Regulation, 2022 (4th ed. 2022).
2. Dimitri Speck, The Gold Cartel: Government Intervention on Gold, the Mega Bubble in Paper, and What This Means for Your Future, Palgrave Macmillan 2013th edition (11 October 2013).
3. Melanie Swa, Blockchain: Blueprint for a New Economy, 2015 O'Reilly Media (10 March 2015).
4. Nathan K. Lewis, Gold: The Monetary Polaris (12th May 2013).
5. Securities and Exchange Board of India, Master Circular for Depositories, SEBI/HO/ISD/ISD-PoD-2/P/CIR/2024/99 (Issued on July 09, 2024).
6. Ministry of Finance, S.O.5401(E) (Notified on December 24, 2021).

Written By:

1. Vanshika Manish Tiwari &
2. Toysha Bhalla