Plan for gold spot exchange picks up pace; govt approval awaited

A panel led by the head of the Indian arm of the World Gold Council (WGC) and industry stakeholders, including 12 domestic banks, eight foreign institutions and trade bodies, have proposed a spot exchange for gold. 

The WGC, market development body for the gold industry, had earlier volunteered to play a role. When the government approves the proposal, it will invite all stakeholders. The report on the issue is now with the Union ministry of finance. 

The exchange is envisaged as connecting all stakeholders — jewellers, bullion dealers, gold refineries and consumers. 

The Union government had already decided to set up a precious metals board of India, as a regulating agency. This is yet to be formalised. Once done, the board would decide on a framework for a spot exchange and stakeholders invited to hold equity. Somasundaram P R, managing director for India at the WGC, who chaired the panel on the subject, said: “Establishing a spot exchange will set the stage for an efficient, transparent and trusted trading eco-system. India is well poised to enable a positive structural shift in trading and become a global gold trading hub.”

According to the report, banks need to be able to buy and sell gold on the exchange, to build and maintain liquidity, and trade derivatives to hedge their pricing risk. It is also proposed that banks act as clearing entities, apart from market making. All these require amendments in the Banking Regulation Act. At present, banks can only sell gold; they can’t buy back. 

Banks will also have to push the development of physical delivery and retail buy-ins. Delivery centres have to be established in all cities. Regulations for all participants in the value chain, including vaults, will be necessary.

The report says quality control needs to be maintained by mandating Good Delivery Standards. And, the government needs to devise incentives to ensure the exchange proves attractive to participants.

Once the spot exchange starts functioning, the panel has also proposed the government allow deferred contracts on it.