In consideration to the issues regarding untraced gold exchange in India, India’s Securities and Exchange Board has flashed out a proposal for Gold Exchange and Vault Managers.According to this, Investors can trade in Gold Exchange in the form of Electronic Gold Receipts (EGR) on existing as well as the proposed Gold Exchange according to the SEBI Framework. An electronic Gold Receipt will be issued for the exchange of the physical Gold. An investor can deposit physical gold in the vaults and get EGRs in return.
The Vault Managers and the SEBI registered depositories will facilitate the issuance of EGRs in exchange for the physical gold. Vault and Storage will be maintained by the SEBI Registered Vault Managers.
Market regulators, SEBI has introduced the regulations, to set out the norms and obligations for the vault managers who provide vaulting services for the gold which is traded through EGRs in exchange for physical gold. The Securities & Exchange Board of India (Vault Managers) Regulations, 2021 is effective from December 31, 2021. It applies to every person carrying out the business of Vault Manager and it is mandatory to get registered with SEBI.
- A Vault Manager is a person who is providing the services of vaulting i.e., the storage and safety of Gold which is deposited to create EGRs. The Vault Manager is Obligated to accept deposit, storage, and safekeeping of gold and create and withdraw EGRs. Vault Manager is also obligated to redress the grievance and reconcile the physical gold with the records of the depository periodically.
- The Electronic Gold Receipt is defined as the instrument which represents gold, as Security for gold exchange. These EGR’s come with the features of trading, clearing, and settlement for the other securities.
- Vaulting Services in relation to gold means the services provided by the vault manager for the storage and safekeeping of the gold, checking the deposited gold as per the gold standards, coordination with the depositors for creation and transfer of the EGR, and providing the services of deposit, storage and withdrawal of gold to the beneficial owner.
- Depositor is the owner of the gold which is being deposited in the vaults in exchange of EGR for the stock exchange.
- Beneficial Owner is the person who has been recorded as the depository or depository participant.
- To be registered as a Vault Manager, the body corporate in India should have a net worth of 50 crores.
- Vault managers are required to have a proper facility for recording all transactions in the electronic form regarding the vaulting services.
- Vault Managers need to maintain the proper documents to trace the gold, its details of storage, withdrawal, purity, transfer, and weight at the time of depositing it & creation of EGR.
- Vault Managers need to safeguard the documents and maintain the record of the last 5 years and they are abiding by the code of the regulator assigned by the board.
DEPOSIT OF GOLD
- With respect to the deposit of gold, the willing person who is creating an EGR shall have to request the registered vault manager about the deposit of the gold.
- Vault Manager is required to check the documents and weight of gold bars at the time of depositing.
- Vault Manager or any authorized person on behalf will ensure that the gold is deposited only through an accredited refinery or a nominated agency.
- At the time of accepting the gold for a deposit, the vault manager shall verify the documents and keep an electronic record.
- List of documents to be deposited:
- Identity proof, Address proof of the depositor or an authorized representative
- Valid mobile number and email address
- PAN number of depositor
- Deposit request letter
- Packing list & Custom clearance documents
- Letter of refinery specifying details of gold bars.
CREATION OF EGR
- SEBI, concerning the creation of EGR, has said that every vault manager shall have a common interface to create and extinguish EGR with the depository.
- Beneficial owner shall specify the trading unit of EGR to the Vault manager while creation of EGR.
- The Vault Manager shall create an EGR on the name of the depositor as the beneficial owner after accepting the gold from the depositor, and enter the details in the interface.
- To get the EGR in the name of such depositor as the beneficial owner needs to give few details in the common interface;
- Account details of the beneficial owner
- Details of the depository participant
- Name of depository having account of the beneficial owner
- Name, address PAN of the beneficial owner
- Bar numbers, purity certificates, name of the refiner,
- Date of creation of a certificate
- The EGR shall contain the number, name & address of the beneficial owner, registration number of the vault manager, name and address of the vault, date of creation of EGR, description of gold bars, and signature of the vault manager.
- Depository shall credit the Demat account of the beneficial owner with EGR.
- And, the duty of the vault manager is to ensure the accuracy of the information.
METHOD OF TRADING IN EGR SEGMENT
- Any person willing to deal in EGR segment on the stock exchange shall deposit the gold with the registered Vault Managers, in ‘deposit unit’, as specified by the stock exchanges.
- The trading of EGR shall take place on stock exchanges, in the ‘trading unit’, as specified by the stock exchanges.
- Stock Exchanges shall ensure that the trading unit is not smaller than 10th part of the corresponding deposit unit.
For example: 1 EGR may be created of 100 gm trading unit or 10 EGRs may be created of 10gm each trading unit, on deposit of 100 gm gold bar.
- The ‘settlement unit’ and ‘withdrawal unit’ of EGR shall be same as ‘trading unit’, as specified by the stock exchanges.
- The details of such deposit unit/withdrawal unit and trading unit/delivery unit shall be explicitly spelt out in the contract specifications of the exchange.
OBLIGATIONS OF VAULT MANAGERS
- The Vault Manager is responsible to take deposits as specified in Chapter-IV SEBI (Vault Managers) Regulations, i.e.
- depositing the gold in a specified manner
- storing the gold in the recognized way
- ensuring the quality specifications of the gold
- create EGRs in exchange for gold
- maintain the records of both recorded gold and allotted EGRs &
- ensures that the deposited gold is safely kept.
- Have a data recovery system to prevent the electronic data from being damaged.
- Take the necessary steps to maintain the quality and have adequate internal control.
- Take care of each detail from the beginning i.e., the deposit of gold to the withdrawal.
- Maintain the record of gold and gold receipts and should submit periodic reports to the board in a specified manner.
PROCEDURE FOR WITHDRAWAL OF GOLD
- The beneficial owner who is seeking to withdraw the gold from the vault, shall request the same to the depository.
- After successful payment of the charge to the vault manager by the depository, the approval of withdrawal of gold will be granted. On the receipt of the depository, the vault manager will hand over the gold and extinguish the EGRs.
GOLD EXCHANGE FUND (ETF) & ELECTRONIC GOLD RECEIPT (EGR)
A Gold ETF is an exchange-traded fund (ETF) that objects to tracking the domestic physical gold price. They are buy-and-hold strategy instruments that are from gold prices and invest in gold bullion.
Trading in Gold ETFs means one can buy and sell gold ETFs just as trade of stocks in electronic form through a dematerialized account (Demat) and when one buys back Gold ETF, will receive the cash equivalent to physical gold.
This new Electronic Gold Receipt (EGR) framework has introduced the exchange along with intermediaries like the vault manager would facilitate the creation of the EGRs. The members/participants of the exchange can convert their physical gold assets into EGRs that would be further bought and sold. The EGR also can be converted into physical gold.
RISK MANAGEMENT FRAMEWORK FOR EGR SEGMENT
The Securities and Exchange Board of India has in continuance to the framework for Gold Exchange and SEBI (Vault Managers) Regulations, 2021, notified a Comprehensive Risk Management Framework for Electronic Gold Receipts (EGR) segment (link) on the recognized Stock Exchange/s covering various provisions related to margins.
In case of any default or failure, the Board can take appropriate measures against the vault manager which can lead to the cancellation of registration/certificate.
The regulator has a right to inspect books of accounts, records, documents, and gold which is deposited in the vault in the interest of the securities market among others. And before any inspection, the regulator shall have to give prior notice of at least 10 days to the vault manager.