The Securities and Exchange Board of India (SEBI) released a consolidated Master Circular on June 24, 2024, to outline the comprehensive regulatory framework for Electronic Gold Receipts (EGRs).

These digital instruments, which are classified as securities, represent physical gold stored in vaults and are traded on recognized stock exchanges.

Understanding Electronic Gold Receipts (EGRs)

Gold has long been traditionally held in physical forms like jewelry, coins, or bars. However, the introduction of the Gold Exchange framework by the SEBI  has ushered in a sophisticated digital alternative called the  Electronic Gold Receipts (EGRs). This article explores the functioning, benefits, and procedural aspects of EGRs.

What are Electronic Gold Receipts (EGRs)?

An EGR is an electronic instrument representing physical gold that is stored in SEBI-registered vaults. The Government of India has officially declared EGRs as ‘securities’ under the Securities Contracts (Regulation) Act, 1956. This classification allows them to be traded on stock exchanges just like company shares, providing a transparent, regulated, and liquid way to own gold.

How the EGR System Functions: The Three Tranches

The operational framework of EGRs is divided into three distinct phases, known as tranches:

1. First Tranche: Creation of EGR: This begins with the supply of physical gold into the vaulting infrastructure through imports or accredited domestic refineries. A Vault Manager, upon receiving the gold, records the details in a common interface. Then he creates the EGR at the behest of the depositor. (Link to details on Vault Managers in India)

Crucially, no EGR can be created without the physical gold being present in the vault. The gold must comply with LBMA or India Good Delivery. LBMA is an international standard set by the London Bullion Market Association, requiring a minimum fineness of 995.0 parts per thousand. India Good Delivery is a domestic equivalent, aligned with standards set by the Bureau of Indian Standards (BIS) With 999 & 995 purity. Once created, the EGR reflects in the investor’s demat account.

1. Second Tranche: Trading on Stock Exchanges: The EGRs are made tradeable on recognized stock exchanges. The Clearing Corporation settles these trades by transferring the EGR to the buyer and cash to the seller. Settlement occurs on a T+1 rolling basis, meaning the transaction is finalized one business day after the trade.
2. Third Tranche: Conversion to Physical Gold: A beneficial owner who wishes to exit the electronic form can request the Depository to convert their EGRs back into physical gold. The Vault Manager delivers the gold and simultaneously extinguishes the EGR.

EGR vs. Gold ETFs vs. Physical Gold

While all three allow for gold exposure, they differ significantly in their structure and utility:

How Can an Investor Buy EGRs?

To participate in the Electronic Gold Receipts segment, an investor must follow these steps:

1. Demat Account: Since EGRs are held in electronic form, a demat account with a Depository Participant (NSDL or CDSL) is mandatory.
2. Unique Client Code (UCC): Investors must have a UCC assigned by their broker, which requires the submission and verification of PAN details.
3. Trading Platform: Once the account is set up, investors can buy EGRs through the trading terminal of their stockbroker during market hours (typically 9:00 AM to 11:30/11:55 PM).
4. Denominations: Stock exchanges specify ‘trading units’ for EGRs, which can be as small as 1/10th of the ‘deposit unit’. For example, if a 100g bar is deposited, the exchange might allow trading in 10g or even 1g increments.

Taxation of EGRs

Since, Electronic Gold Receipts are classified as ‘securities’, their taxation is generally aligned with other non-equity financial instruments:

• Capital Gains Tax: If held for more than 24 months, gains are typically treated as Long-Term Capital Gains (LTCG) and taxed at 12.5%. Holding periods of less than 24 months result in Short-Term Capital Gains (STCG). STCG is taxed at the investor’s applicable income tax slab rates (marginal tax rate).
• No capital gains tax applies upon converting physical gold to EGR or vice-versa.
• GST: While GST is applicable on the purchase of physical gold, the trading of EGRs on an exchange is generally exempt from GST, as it is a transaction in securities. However, GST  (3%) may be triggered at the time of physical withdrawal (Tranche 3). This is when the electronic receipt is converted into a physical commodity.

Safety and Dispute Resolution

The SEBI framework ensures high security through mandatory Financial Security Deposits (FSD) from Vault Managers to compensate for any losses. Additionally, vaults must have advanced security like CCTV, biometric sensors, and armed guards. If an investor disputes the quality of gold during withdrawal, they can request an inspection by an empaneled assayer. This is while the gold is still within the vaulting infrastructure.

EGRs represent a significant step toward the “One Nation, One Price” goal for gold in India. EGR provides a regulated, transparent, and secure digital ecosystem that is directly convertible to physical gold. EGRs offer a compelling middle ground for both investors and jewelry manufacturers.