How Do EGRs Work?
According to the EGR model, physical gold will be placed with a SEBI-registered vault manager. After verification and storage, electronic receipts for the deposited gold will be provided in dematerialized form.
These receipts can then be traded on the exchange like stock shares. Trading can be done by buying and selling EGRs through the exchange portal, which offers transparent price discovery and better liquidity.
Given that EGRs represent physical gold holdings, traders may also redeem their EGR receipts for physical gold deliveries at any time they wish.
At present, only gold meeting Good Delivery Standards prescribed by the LBMA and BIS is eligible for EGR creation.
Key Benefits of EGRs
Perhaps the most significant benefit of EGRs is the removal of problems related to owning physical gold. Investors don’t have to bother themselves about the cost of storing their precious metal or keeping it secure from theft. Moreover, there won’t be any problem related to purity because the gold will be stored and authenticated according to prescribed standards.
In addition, another important feature of electronic gold receipts is that it will be easier for investors to participate in the market using these instruments in smaller quantities as well.
It is hoped that this system will facilitate a strong ecosystem in the gold trading markets.
Who Will Benefit From EGRs?
The implementation of EGRs would certainly benefit many parties within the gold ecosystem, including jewellers, refiners, gold traders, and institutional investors.
The implementation of EGRs would be a great benefit to retail investors, as they will have access to invest in gold through a secure channel. In times of volatility and uncertainty on a global scale, gold remains one of the safest investment assets.
In terms of financial inclusion, bringing gold into the mainstream financial market would prove beneficial to NSE.
How Are EGRs Different From Gold ETFs?
However, despite the similarities in offering investment exposure to gold prices, there are a number of differences between these two products.
Firstly, while EGRs indicate ownership of physical gold in vaults, Gold ETFs refer to the units of a mutual fund scheme investing in either gold or related securities.
Moreover, an investor holding EGRs can exercise the choice of receiving physical gold by surrendering their receipts; this is not the case with retail investors in Gold ETFs, who do not have such an option available.
There is a well-known clientele among investors of Gold ETFs, but EGRs constitute a recent innovation and will need time to develop into a full-fledged market.
NSE’s Vision for the Gold Market
While speaking at the event, the NSE executives referred to EGRs as a game-changing project for the gold market in India. Speaking about the same, the Managing Director and CEO of NSE Ashishkumar Chauhan drew parallels between the EGRs and dematerialisation of stocks from the 1990s, arguing that it can address issues associated with physical gold.
The Chief Business Development Officer of NSE, Sriram Krishnan, said the company intended to make trading in gold more accessible with the help of technology and liquidity structure.
SEBI Reviewing EGR Framework
Even after the rollout, Chairman of SEBI, Tuhin Kanta Pandey, mentioned in December that the regulator is studying the current EGR framework as the market still lacks the required momentum.
As per his views, the regulator is examining various issues related to structures, operations, and regulations, which might have restricted its adoption till now. He further suggested industry players raise awareness and urge investors to buy only regulated gold products.
NSE Also Launches PARVA
Along with the EGRs, NSE also introduced PARVA, or Past Risk and Return Verification Agency, in collaboration with CARE Ratings. This system attempts to validate the assertions about performance by portfolio managers and algo-traders and has been touted as the first-ever SEBI-backed project of its kind.
