What’s behind the vault of India’s gold exchange?

The life of every Electronic Gold Receipt (EGR) begins and ends with physical gold. Between these two points lies a carefully choreographed journey. Before an EGR lands in your demat account, physical gold must first pass through a tightly regulated ecosystem that verifies the metal, creates the receipt and enables trading on the exchange.

Why a gold exchange?

For decades, India’s physical gold trade largely took place through jewellers, bullion dealers and over-the-counter transactions. While gold itself was standardised, trading remained fragmented. Despite accounting for a large share of global gold consumption, India lacked a nationwide exchange for trading standardised physical gold, with prices varying across markets/States.

The EGRs were introduced to bridge this gap. The Gold Exchange provides a national platform for trading standardised physical gold, facilitates transparent price discovery, improves liquidity and assures the quality of gold.

Creation of an EGR

The journey begins when the owner of eligible physical gold deposits it with a vault manager registered with the Securities and Exchange Board of India (SEBI) for conversion into EGRs. Only eligible gold sourced through imports or exchange-accredited domestic refineries can be converted.

The gold is weighed, assayed and verified, after which the vault manager records the deposit in the common interface, and no EGR can be created unless it is backed by the corresponding physical gold in the vault. The EGR is then credited to the beneficial owner’s demat account and made tradeable on the stock exchange by the Depository. The vault manager and the Depository regularly reconcile EGR records with the underlying physical gold, while the Depository also conducts periodic inspections of the vaulted gold.

Trading of an EGR

The moment an EGR enters a demat account, it sheds the identity of the gold bar and begins a life of its own. Unlike physical gold, it can change hands countless times without a single gram moving out of the vault. Behind the scenes, the Depository keeps the exchanges and clearing corporations updated on newly created EGRs, while the clearing corporation ensures seamless settlement between the buyer and the seller.

Fungibility

Once an EGR is created, it is no longer tied to a particular gold bar. Instead, it represents a standard quantity and purity of gold. So, when an investor converts an EGR into physical gold, they receive gold of the same specifications, and not necessarily the very bar that was originally deposited. This feature, known as fungibility, works together with inter-operability, allowing investors, wherever possible, to collect their gold from a different eligible vault location instead of returning to the vault where it was originally deposited.

Conversion

The lifecycle of an EGR ends when the owner opts for physical delivery. On receiving the request through the Depository, the vault manager hands over the gold and simultaneously extinguishes the corresponding EGR. The Depository then updates the stock exchanges and clearing corporations to keep their records in sync.

The EGR ecosystem

Unlike physical gold transactions that typically involve only a buyer and a seller, the EGR brings together multiple regulated entities. Vault managers safeguard the gold, depositories maintain electronic ownership records, stock exchanges facilitate trading, clearing corporations settle transactions, brokers connect investors to the market, while eligible gold depositors create EGRs and investors trade.

Should EGRs be part of your portfolio?

EGRs are certainly not a replacement for jewellery. Whether they will emerge as a viable alternative to Gold ETFs remains to be seen. EGRs combine the convenience of trading electronically while retaining the option of taking physical delivery of gold.

Every new investment avenue attracts early enthusiasm. Before climbing onto the EGR bandwagon, investors should first understand the framework behind it. After all, informed investing begins with understanding the product. Knowledge must precede participation.

(The writer is an NISM & CRISIL-certified Wealth Manager and certified in NISM’s Research Analyst module)