• Sakshar Law Associates

Legality of E-Gold and Gold Stock Exchange


Sakshi Shairwal

Diya Dave

Gold has been used as a medium of exchange since ancient times. In fact, at a point in time, most countries fixed the value of their currency in relation to a specific amount of gold under the Classical Gold Standard. Around the globe, the liquidity of gold is comparable to that of financial securities and thus, it is a very important asset from the point of view of investment. In this light, the latest framework of the Securities and Exchange Board of India (SEBI) comes as a major breakthrough in the financial market. This article will primarily explain the contemporary discourse around the legality of Electronic Gold (E-gold) that has arisen due to the said framework.

What is SEBI’s Gold Exchange Framework, 2021?

SEBI, in its Board Meeting held on September 28 this year, approved the framework for Gold Exchange and SEBI (Vault Managers) Regulations, 2021. This move came after the Finance Minister mentioned the intent to establish the same in her 2021-22 budget speech. This means now investors and common people will be able to purchase gold online in the form of digital receipts. In simpler words, people can now own gold in an electronic form as opposed to physical gold. These instruments will be called Electronic Gold Receipts (EGRs) and will be termed “securities” under the Securities Contracts (Regulation) Act, 1956. These EGRs will be convertible into real gold upon the wish of their holder. An EGR holder can continue to hold it for as long as they wish to as they are “perpetually valid”. The Board also issued a consultation paper on Gold Exchange and SEBI (Vault Managers) Regulations, 2021. It intends to establish a system where stock exchanges throughout the country would be able to launch gold exchanges.

Functioning of EGRs

The SEBI (Vault Managers) Regulations, 2021 will incorporate a body called “Vault Manager” and will be regulated as a SEBI intermediary. Any registered corporate entity with a minimum net worth of 50 Crore can file an application to be registered as a vault manager. They will perform duties such as accepting deposits, creating EGRs, and storing, safekeeping, and withdrawing gold.

Any person who wants to convert their gold into a digital receipt can go to a vault manager and deposit the gold. After that, vault managers will conduct a quality check and issue an EGR to them. Each vault manager can decide the denominations in which they want to offer EGRs, upon approval by the SEBI. Primarily, EGRs will be given in the denominations of 1 kg, 100 g, or 50 g, and smaller denominations of 10 g and 5 g might also get approval. These EGRs will be eligible for buying and selling on an exchange like usual equity shares of listed companies. They will be treated as securities for all purposes from the investors’ point of view. EGRs can be converted back into physical gold upon surrendering the receipts to the vault managers. Moreover, SEBI intends to make EGRs fungible, in the sense that a receipt issued from a particular vault manager can be redeemed by another one.

Pre-existing Gold Trading System

Buying gold from jewelers is the most common method of “investing” in gold. Apart from that, trading in gold in India could only be done by investing in Gold ETFs (Exchange Traded Fund) and Gold Futures. ETF is a commodity-based mutual fund that is used for investing in assets including gold. These funds are represented by assets, but not in a dematerialized form (only on papers). ETFs are invested like stocks and when they are traded off, the investors receive equivalent amounts of cash instead of gold.

Gold Futures, on the other hand, are futuristic contracts of purchase of gold at the currently determined prices. The contract is executed on a future date decided by the parties when the buyer pays the predetermined amount and the seller delivers the gold. However, these provisions work on the mere value of gold and not in the actual metal.

Significance of Gold Exchange

SEBI’s main purpose to introduce gold exchanges in India was to create more transparency in the spot pricing of gold. As opposed to gold futures, a gold exchange would focus on price discovery thus, creating a lucrative ecosystem for the physical market. A NITI Aayog report has shown that such gold exchanges make the market more efficient by centrally presenting the demand and supply information to all. This would ultimately help bring down imports from other countries. Considering the market of India and the auspicious value of gold, this will enhance accessibility for small buyers while increasing the liquidity of the metal. It would keep the cost of gold under control and attract more buyers. The system of gold exchange is existent in many other jurisdictions like the United States, London, and China. The most prominent one is the Shanghai Gold Exchange (SGE) as China is the largest consumer of gold in the world. Therefore, experts believe that a parallel can be drawn between the success of the gold exchange in China and that in India.


As SEBI has asked for people’s suggestions and contributions, these are mere speculations about how EGRs will be taxed in India. Undoubtedly, the Securities Transaction Tax (STT) would be applicable on EGRs. STTs are levied on transactions that happen on listed stock exchanges in India. Major concerns are arising from experts who are deliberating on whether the Goods and Services Tax (GST) would be charged on the gold exchange transactions. Article 2(52) of the CGST Act explicitly excludes securities from the definition of “Goods”. Since EGRs are of the nature of securities, they must also be excluded from the ambit of “Goods”.

However, a transaction of withdrawal, where a person surrenders their EGRs to get gold in exchange might have different implications. In that case, gold would be considered a commodity. These are the contentions that will get resolved once a draft is fixed upon by the SEBI. SEBI has asked for public feedback which has made the investors more hopeful about their future interests.

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