The much talked about exchange for spot trading in gold might be allowed soon after market participants found a way out in a closed-door meeting late this week.
So far, the stumbling block had been the manner in which a trading platform or an exchange in gold for spot trading would be regulated. A spot exchange for gold has already been accepted in principle by the Union Ministry of Finance.
After deliberations, it was decided that the Securities and Exchange Board of India (Sebi) could regulate the gold spot exchange. Sebi already regulates gold futures, gold exchange traded funds (ETFs) under a special power given to it by a notification, where underlying asset gold is bought by the company managing the ETF.
Sumit Agrawal, ex-Sebi official and author of a book on the Sebi Act said, "Stock exchanges and futures markets are governed by the Central Government through the Securities Contracts Regulation Act under the Union List. On the other hand, under investor protection powers which are interpreted by the Judiciary in the residuary item of the Union List, Sebu regulates various activities such as collective investment schemes. Otherwise, it is usually a scheme where trees are grown on land and both land and agriculture are state subjects. Similarly, agriculture mandis are under state but 'investor protection' is not under State, Union or Concurrent list of the Constitution and hence a central regulator -- which could be Sebi also -- can regulate gold trading and investments. Courts always read in favour of something which brings ease of doing business, reduces unaccounted and benami trade, regulates the unregulated market, creates a benchmark, and converts a distrusted market into a trusted one."
"Generally, governments thrust regulators on industry, and industry resists. This, however, is a curious case where industry is asking the Government to create a regulator or the assign one of the existing ones like Sebi, RBI or WDRA. Recently, Finance Minister announced 'integrating spot and derivative market' in the budget speech." he added.
Consumers of jewellery have a consumer forum for any issues but investors of gold have no appellate mechanism. Further, there are no any rules or regulations for trading which has led to gold becoming one of the two largest avenues for black money generation."Generally, governments thrust regulators on industry, and industry resists. This, however, is a curious case where industry is asking the Government to create a regulator or the assign one of the existing ones like Sebi, RBI or WDRA. Recently, Finance Minister announced 'integrating spot and derivative market' in the budget speech." he added.
A spot exchange for gold was first proposed by the Indian Bullion and jewellers Association (IBJA) with BSE as a 30 per cent equity partner and trading was to take place on a platform to be set up by the BSE. When the proposal was sent to the ministry of finance, it was forwarded to Sebi. Sebi, in turn, had said that the spot exchange would not fall under its jurisdiction and hence the issue was left hanging.
Now, there seems to be a consensus, according to knowledgeable sources, "that to protect investors' interest, Sebi may be allowed by the finance ministry to regulate online spot gold trading".
An official connected with the development said, "A spot gold exchange with electronic nationwide trading can provide one gold price which is discovered most transparently." IBJA has been making this point for a long time. "IBJA wants exchange for price discovery, gold standardisation, guarantee of payment etc to reduce import and increase the lending and borrowing mechanism in the gold market," the official said.
If the solution on how gold should be regulated is accepted, which is likely according to sources, the gold exchange will be approved soon. It will be up to Sebi to work out the nitty gritty involving whether there is a need for a separate company for spot trading or whether it can be conducted under the existing exchange where it will be traded as a separate segment. Sebi will also have to look at whether it will use ts powers for forward trading with specific or non-specific delivery contracts.
Trading under an exchange which is regulated will help improve risk management, payment guarantee and quality issues apart from real price discovery and transparent trading. The challenges, as discussed in the closed-door meeting held on Wednesday, include setting up the nationwide infrastructure required for movement and storage of gold, quality testing and so on. Indian refineries would prefer "BIS hallmarked bullion bars to be accepted as good delivery till the government of India develops its own gold standards", said one old-time refiner.