While gold continues to be a highly favored investment asset, Electronic Gold Receipts (EGRs), designed to offer exchange-traded ownership of physical gold, have failed to capture significant investor interest. This disparity comes despite a booming gold market, prompting market participants and regulators alike to examine the underlying causes.
SEBI chairman Tuhin Kanta Pandey recently acknowledged the slow uptake, stating that “EGRs haven't taken off in the expected way, but gold ETFs have,” highlighting a clear adoption gap between the two gold investment products.
Key Factors Hindering EGR Adoption
Several factors contribute to the muted demand for Electronic Gold Receipts, ranging from market mechanics to investor familiarity.
Low Liquidity and Trading Volumes
One of the most significant hurdles for EGRs is the lack of sufficient secondary-market liquidity. Trading volumes on exchanges like NSE and BSE typically remain below ₹1 crore to a few crore rupees daily. This pales in comparison to the robust trading activity seen in gold ETFs and gold futures. Low volumes, coupled with wide bid-ask spreads and limited market-making, make it difficult for investors, particularly those with larger positions, to exit their investments quickly and efficiently.
GST on Physical Redemption
Taxation also plays a crucial role in deterring EGR adoption. While trading EGRs on an exchange is GST-free, converting an EGR into physical gold attracts a 3% Goods and Services Tax (GST) at the time of withdrawal. This added cost for investors who eventually desire physical delivery makes EGRs less attractive compared to other gold investment avenues. Furthermore, EGRs being classified as securities rather than commodities can create complications regarding input tax credit for institutional investors and jewellers.
Cumbersome Physical Conversion Process
The process of converting physical gold into an EGR, or vice-versa, involves additional friction. Owners must transport their gold to a SEBI-registered vault manager, where it undergoes assaying for purity before being converted into an electronic receipt. This process incurs fees and can be inconvenient due to a limited network of approved vault managers. For those looking to convert existing jewellery, the economics are even less appealing, as the making charges paid at purchase are not recovered during the EGR conversion.
Lack of Investor Familiarity
Adhil Shetty, CEO of BankBazaar, points out that gold's inherent popularity doesn't automatically extend to every new investment format. “Gold's popularity as an asset doesn't automatically transfer to a new format for holding it,” Shetty explained. He noted that EGRs are a relatively recent addition, distinct in structure and process from traditional gold holdings. Investors evaluate new formats based on ease of buying/selling and the complexity of physical conversion, which involves brokers, vault managers, and the 3% GST. As with any new investment, it takes time for investors to build familiarity and trust before widespread adoption can occur.
The Path Forward for Electronic Gold Receipts
For Electronic Gold Receipts to gain wider acceptance and truly compete in the gold investment landscape, market participants suggest significant improvements are needed. Enhancing liquidity, expanding the physical conversion infrastructure, and streamlining the overall investor experience are crucial steps. Until these improvements are realized, gold ETFs and physical gold will likely continue to hold a significant familiarity advantage among investors.