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INDIA
GOLD POLICY
CENTRE

Viability of a Gold Exchange in India

Prof. Joshy Jacob

([email protected])
Prof Jayanth R Varma
([email protected])

Indian Institute of Management, Ahmedabad

February 2016

India Gold Policy Centre

Indian Institute of Management
Vastrapur, Ahmedabad 380015, Gujarat, India
T : +91 79 66323456 / 26308357 F : +91 79 26306896
India Gold Policy Centre is funded by the World Gold Council

India Gold Policy Centre

Indian Institute of Management
Vastrapur, Ahmedabad 380015, Gujarat, India
T : +91 79 66323456 / 26308357 • F : +91 79 26306896

India Gold Policy Centre is funded by the World Gold Council

 Acknowledgments

We gratefully acknowledge the financial support provided by

the India Gold Policy Centre for conducting this study. We
thank the two anonymous referees for their useful comments
on the project proposal. We would like to thank all those who
participated in our field surveys and brainstorming session,
for sparing several hours of their valuable time to help us un-
derstand the dynamics of the Indian gold trade and the key
success factors for a Gold Exchange. Many of these partici-
pants have requested anonymity so we refrain from naming
them here. We would also like to thank Ms. Medha Ashtekar
who assisted us in doing the study and also shared her rich
experience in the global gold industry with us. Needless to
say, any errors that remain are ours.
 Viability of a Gold Exchange in India

Executive Summary

Despite being the second largest importer of gold in the world with a demand
of nearly 1,000 tonnes, India lacks many key elements of the gold ecosystem.
Many jewellers and traders import gold in refined form from markets like
Dubai and Singapore. Further, the gold market remains fragmented in India
and non-trivial price arbitrage exists across the channels of gold buying and
selling. A gold spot exchange in India could be a national channel to buy
and sell standardized quality gold in India and to create a national pricing
structure of gold. The exchange could provide quality storage and vault
facilities, and facilitate the financing of gold inventory at internationally
competitive rates.
To evaluate the viability of setting up a spot gold exchange in India, we
carried out a survey of a wide range of participants in the gold value chain,
organized a focus group discussion with the key players in the market, and
analysed the experience of international gold exchanges.
International Experience

As the global gold market continues to shift from West to East, several
Asian countries have set up global scale physical infrastructure required
for refining, storage, transport and trading of gold. Across the different
international markets examined, gold exchanges and related infrastructure
appear to have significantly contributed to the development of an efficient
market for gold by way of: efficient price discovery; assurance in the quality
of gold; active retail participation, use of gold bars, gold coins and gold linked
financial products for investment instead of jewellery; greater integration
with financial markets through gold leasing and lending; and acting as a
channel for gold recycling.

Field Survey and Brainstorming Session

To understand the gold market in India and the scope for a Gold Exchange,
we conducted a field survey which yielded the following key conclusions:

• Most of the demand for physical gold in India is routed through hubs
outside India, particularly Dubai. The quality of gold available and
the price in various parts of the country vary significantly.

• Large players procure gold directly from miners and traders in overseas
gold hubs, but some of them have expressed keen interest in using a

i
 gold exchange set up in India. While we do not disbelieve the large
players who indicated that they would source gold from an Indian gold
exchange, we have accounted for the possibility that their participation
might be lower than their stated intention.

• The medium and small jewellers are often forced to dependent on large
players and face significant price disadvantage. They are keen to source
gold through a gold exchange.

• Resellers constitute a significant part of the demand from jewellers and

refiners. There is no transparency in the activities associated with the
reselling of gold into the market.

In addition to the field survey, we organized a brainstorming session that

brought together leading jewellers, refiners, bankers, commodity exchanges
and other participants in the gold value chain to discuss the need for and
the design of a spot gold exchange. Participants were of the view that
as gold does not have a standard price in India, a national-level spot ex-
change would benefit all stake-holders by ensuring transparency in pricing
and standardization. It would also help India evolve as a gold trading hub.
The session envisaged a domestic and an international exchange which would
allow two-way trading in physical gold and also have other derivative prod-
ucts for hedging purpose. The exchange could utilize existing infrastructure
and could be launched by promoters who already have the experience of
operating other exchanges in India or abroad. The consensus was that the
exchange would be feasible if it attracted a minimum trade quantity of about
100 tonnes and this was feasible given the annual demand of about 1,000
tonnes in India. The participants felt that it is ideal to have the following
infrastructure as part of the exchange: gold vaulting facilities set up by ex-
perienced promoters, logistic arrangements to achieve T +1 delivery across
21 major locations in India, quality assurance of gold and standardization.

Setting up a Gold Exchange in India

Our assessment based on conversations with a wide variety of potential

stakeholders and participants is that if 10% of India’s gold imports flow
through the exchange, this 100 ton volume would provide the minimal liq-
uidity to sustain a contract. This minimal liquidity would attract larger
participation and snowball into a vibrant contract that becomes the dom-
inant forum for price discovery and for investment in physical gold. Our
assessment based on our survey is that this minimal initial volume is emi-
nently feasible. Survey participants indicated that their participation in the
spot exchange is likely to be well above 10%, and even if we discount these
stated intentions (particularly for large players, 10% appears to be quite

ii
feasible). Our survey also showed that there are significant segments that
are under served by the existing market structure, and they would be keen
on the greater transparency afforded by the exchange.
The gold exchange should offer a wide range of contracts to meet the needs
of the gold industry:

• Domestic Spot Gold Contract

• Global Spot Gold Contract denominated in US dollars based on deliv-

ery outside the Domestic Tariff Area (DTA)

• Dore Swap Contract

• Gold Lending and Borrowing Mechanism (GLBM)

A separate clearing corporation only for the Gold Exchange or for the global
contract would not have the scale and resources to achieve global acceptance.
A large global clearing corporation or a leading domestic clearing corpora-
tion would be preferred. It would also be advantageous to provide a facility
for dematerializing the gold held in the Exchange vaults.
Promoters of the exchange should be neutral players to ensure transparency
and integrity. Participants in the gold industry (like jewellers, refiners and
traders) would suffer from conflicts of interest in promoting and operating a
gold exchange. The neutrality requirement means that existing commodity
exchanges, stock/derivative exchanges, banks and other financial entities are
natural candidates for promoting a gold exchange in India.
The whole complex of domestic and global gold contracts would benefit im-
mensely from global collaboration and partnerships: partnership with gold
markets in Singapore, London and Shanghai; minority equity participation
by multilateral financial institutions like the ADB and the BRICS bank; and
technical collaboration with professional bodies like the LBMA.
We would like to emphasize that governance is one of the key things that an
Indian Gold Exchange would bring to the table. Governance measures would
include: an India Responsible Gold Policy, Gold Quality Assurance, Risk
Management, Clearing and Settlement, and Regulation and Supervision.
To provide gold vaults inside and outside the DTA in close proximity, the
Gold Exchange must be located in or close to an SEZ. An International
Financial Services Centres (IFSCs) has two big advantages: a regulatory
regime that provides global credibility, and sufficient exemptions from cap-
ital controls to make the global contract feasible. Based on our survey, the
geographic location of the Exchange within India is not a critical factor.

iii
Exchange Trading and Capital Controls

For the domestic gold contracts, the participation rules could be as follows:

Domestic Participants Foreign Participants

All domestic entities Foreign Portfolio Investors
(jewellers, refiners, traders, (FPIs) on lines similar to
banks, financial institutions, stock markets
individual investors)

Participation in the global contracts would be subject to different rules:

Domestic Participants Foreign Participants

Domestic players who are All foreign participants and
allowed to trade or hedge in not just FPIs.
global markets in accordance
with FEMA.
Resident individuals within
the $250,000 limit under the
Liberalized Remittance
Scheme for investment
outside India.

Taxation

As in other Asian countries like China and Singapore, investment grade gold
traded on the exchange should be exempted from indirect taxes like VAT and
GST, but should be subject to Commodity Transaction Tax (CTT). This
proposal to levy CTT in lieu of VAT/GST is likely to be broadly revenue
neutral (if not revenue accretive) for the government.

Conclusion

A spot Gold Exchange in India is eminently viable and would help create
a vibrant gold ecosystem in India commensurate with India’s large share of
global gold consumption. The Gold Exchange would lead to efficient price
discovery, assurance in the quality of gold, active retail participation, greater
integration with financial markets, and greater gold recycling. The Gold
Exchange would also help in the gold monetization efforts of the government.
The Gold Exchange must set high standards of governance and aim at
achieving leadership in Asian gold markets. To this end, it must be pro-
moted by neutral players who do not suffer from conflicts of interest and

iv
must be regulated by SEBI, which is the regulator for stock, derivative and
commodity exchanges in India. It must also seek global partnerships and
collaborations to increase its global reach.
A Gold Exchange located in an International Financial Services Centre
would offer the greatest benefits in terms of ability to offer domestic and
global gold contracts, gold vaults inside and outside the Domestic Tariff
Area, and ability to attract international participants. Within the con-
straints of capital control regulations, both the domestic and global contracts
on the Gold Exchange must be open to the widest range of participants.

v
 Viability of a Gold Exchange in India

1 Background and scope of the study

India is the second largest importer of gold in the world with a demand of
nearly 1,000 tonnes. Despite this, most of the gold is imported in refined
form from markets like Dubai and Singapore, which forgoes the value added
activity which could be undertaken in India. Lacking the infrastructure
to procure gold at globally competitive prices in India, many jewellers and
traders use the Dubai and Singapore markets. India provides a substantial
chunk of the gold demand in these countries. Further, the gold market
remains fragmented in India and non-trivial price arbitrage exists across
the channels of gold buying and selling. India has a large inventory of
household and institutional gold holdings, however, the share of recycled
gold in the Indian market remains tiny. Increased recycling can reduce the
import reliance and the attendant problem of foreign current outflows.
The absence of a spot exchange in India is in stark contrast to the success
of gold futures trading in India. During 2013-14, about 9,000 tonnes of gold
(with a value of |25 trillion) were traded in the futures exchanges in India1 .
This is about nine times the annual demand of 1,000 tonnes of gold in India,
but the futures trading is almost entirely cash settled.
Against this background, the study attempts to examine the role and fea-
sibility of a gold spot exchange which could act as an exclusive institution
focused on gold trading. The exchange could be a national channel for buy-
ing and selling standardized quality gold in India and to create national
pricing structure of gold. The exchange could involve quality storage and
vault facilities, and facilitate the financing of gold inventory at internation-
ally competitive rates. Specifically we examine (a) potential demand for the
facilities of a gold exchange by various value chain partners in India (b) the
scope of activities of the gold exchange given the potential demand and (c)
economic viability of the gold exchange.
We have gathered the view of the gold value chain participants on the feasi-
bility of a gold exchange through a survey and a focus group discussion of the
key players in the market. The survey has uncovered the current practices
of gold procurement, cost associated with the current procurement practice,
perceived benefits of current practices, perceived benefits and the need for a
gold exchange in India. We have also analysed the global experience of gold
exchanges, and drawn on the lessons from these countries to understand the
viability, design and governance of a Gold Exchange in India.
1
Source: Forward Markets Commission, Monthly Report, March 2014

1
2 Gold Exchanges: Global Experience

2.1 Turkey

Turkey imports around 180 tonness of gold annually and it is the world’s
fourth largest gold consumer, accounting for about 6% of the global demand.
It is estimated that Turkish households have at least 3,500 tonnes of gold2 .
Gold is intimately linked to the Turkish culture, like in India. Gold is
gifted during almost all important life events and it is used as a medium of
exchange even today. Investors use it as an inflation and currency hedge.
Turkey’s jewellery fabricating skills are exemplary and it has significant
jewellery exports. Many international brands source their designer jewellery
products from Turkey. Like India, Turkey faces significant shortage of local
production to match the demand. It has a small but growing gold mining
industry. The domestic gold production was about 33 tonnes in 2013, leaving
a large gap between domestic demand and production?? .
Till about 1980s, the gold sector in Turkey was highly regulated. A number
of reforms overtime has modernised the gold sector in Turkey. Some of the
key reforms are given below:

• Turkey started to significantly liberalize gold trade from 1993. The

Central Bank of the Republic of Turkey allowed a greater role for
market forces in gold trade. In 1995, it established the Istanbul Gold
Exchange (IGE) to provide a price discovery mechanism and to en-
sure the quality of gold. IGE offered spot contracts in gold and later
launched gold futures and options. The IGE had been very successful
in creating a link between precious metals markets and financial mar-
kets, and enhanced its position as a regional financial centre. The IGE
prices quickly established the benchmark price for gold in Turkey.

• In 2011 Turkey started monetising its stock of gold and started to fur-
ther integrate gold into its financial system. As part of the gold mone-
tization it allowed (a) commercial banks to hold part of their required
domestic currency reserves in either foreign currency or gold and (b)
buy and sell gold coins and jewellery. The substitution of high-yield
Turkish lira with gold for reserves made banks more stable?? . This
has created an incentive for commercial banks to draw gold from the
households into the banking system and banks aggressively promoted
gold current accounts, gold accumulation plans, gold structured prod-
ucts, and a range of lending products. Some of the products include
(a) gold accounts which allow savers to trade gold, Turkish lira and
foreign currencies (b) interest bearing fixed term gold savings accounts
2
Source: “Turkey: gold in action”, World Gold Council Report, 2015.

2
 and (c) gold-dispensing ATMs so consumers can easily buy hallmarked
bars.

• By the end of 2013, commercial banks held around 250 tonnes, equiv-
alent to $10.4 billion worth of gold. While most of the stock was
accumulated from investors switching from Turkish lira and foreign
currency into gold accounts, it also included 40 tonnes of household
stock of gold. The proportion of recycled gold had been rising in the
Turkish market. The recycling is supported by the establishment of
several LBMA accredited refineries.

• In April 2013, the IGE was merged with the Istanbul Securities Ex-
change (IMKB) and Futures and Options Exchange (VOB). These
together created Borsa Istanbul (BIST), and succeeded in creating an
efficient structure to boost Istanbul as a financial centre. Like other
gold exchanges BIST serves as a gateway for gold imports. BIST
is also responsible for licensing gold importers and assayers, and for
maintaining the quality of gold imported through it. Gold traded on
BIST is tax-free. This has laid the foundation for gold as a part of
Turkey’s financial system.

The initiatives of Turkey has led to a number of tangible outcomes (a) it

has been able to monetize around 300 tonnes of gold (b) with a number
of gold related products, the consumer appetite has started to shift away
from physical gold (c) the creation of high quality gold infrastructure has
increased trust in the domestic market and significantly increased the pricing
efficiency and (d) the current account deficit has significantly narrowed as
an outcome of the new policy initiatives in gold.

2.2 China

China is the world’s largest consumer of jewellery and physical bullion and
accounts for about 26% of the world demand in 2013.3 It is also the world’s
largest gold producer and importer. The Chinese domestic demand for gold
originates from jewellery, investment, industry and the official demand. The
aggregate Chinese demand is around 1,400 tonnes in 2014, out of which the
domestic market contributed nearly one-third.4 Gold is central to Chinese
households and jewellery, which accounts for about 60%, is the mainstay of
the private sector gold demand in China.5 The role of gold as an investment
3
Source: China’s Gold Market: Progress and Prospects, World Gold Council Report,
April 2014.
4
Source: Understanding China’s Gold Market, World Gold Council Report, 2014.
5
Source: China’s Gold Market: Progress and Prospects, World Gold Council Report,
April 2014.

3
vehicle has seen an exponential growth in the recent years with the high
economic growth in China. Today, it is one of the preferred vehicles of
savings among households.
Prior to 2002, the entire gold market in China was tightly controlled by the
People’s Bank of China (PBOC). PBOC set up the Shanghai Gold Exchange
(SGE) in October 2002, as part of the efforts to liberalize the gold sector.
SGE offers spot and futures contracts in gold, silver and platinum. It is
expected to provide the Chinese, direct access to the gold wholesale market.
It also monitors the physical gold traded in the Chinese market. Most of
the gold entering the Chinese market from imports, domestic mining and
recycling go through SGE for the initial trading, except the gold imported
by jewellers with import/export license. All the Chinese citizens are allowed
to buy gold and trade at the SGE through a commercial bank, by opening an
SGE account. SGE has over seven million individual and 8,000 institutional
clients.
It took several years for SGE to become the primary channel for gold imports
and trading in China. It was only in 2007, the physical gold demand in
China matched the deliveries from SGE 6 . The standard gold traded at
SGE is exempted from value added tax.
SGE focuses on meeting the domestic physical bullion demand and it has
become the main vehicle for investment in physical gold in China. The
gold spot price of SGE dominates the Chinese market. The gold price at
SGE is mostly synchronised with the international gold prices. To ensure
synchronisation with the international markets and to facilitate arbitraging,
SGE offers night trading sessions which overlap with major international
markets. Institutional clients are the most important traders at SGE and
commercial banks account for most of the trade in the exchange (about
58%). It has wide membership from domestic commercial banks, foreign
banks, and firms in involved the production, trading and investment in gold.
The average daily volumes of 99.99 percent purity contract on SGE increased
to about 20.43 tonnes in October 2014 from 11.7 tonnes in October 2013.
As against the SGE volume, London Bullion Market Association (LBMA)
has an average volume of 493.3 tonnes7 . While the volume at SGE is very
small compared to the London, it is attracting significant trading attention
from international institutions.
Gold is recycled in China either for cash or for gold. Gold, recycled and
converted into standard bars by refineries have an incentive to trade through
6
Source: The Mechanics Of The Chinese Domestic Gold Market, https://www.
bullionstar.com/blogs/koos-jansen/the-mechanics-of-the-chinese-gold-market/
7
Source: Shanghai Gold Trade Passes Record as China Seeks More Sway, down-
loaded from http://www.bloomberg.com/news/articles/2014-12-03/shanghai-gold-
exchange-bullion-trading-volumes-expand-to-record

4
SGE owing to the value added tax benefit. Only approved refineries are
allowed to sell recycled gold bars to SGE. In 2013, recycled gold accounted
for more than 100 tonnes of the total supply in Chinese domestic supply.
Chinese commercial banks dominate physical gold financing and account for
a significant share of the trading volume. Only approved commercial banks
in China can import gold into the country and they are traded at SGE before
entering the Chinese domestic market. Banks offer various gold related
products such as gold accumulation plans, gold trading, gold pledging and
gold leasing8 . Banks sell gold coins and bars to households. The exchange
also facilitates the market for gold lending and plans to develop a national
gold lending market. In 2014, China set up an international gold exchange
inside the Shanghai free trade zone. The approved members in the exchange
include the top-tier international banks. The new exchange attempts to
place Shanghai as an alternative to London for international gold traders.
China also has a vibrant derivative market in gold which is largely operating
at the Shanghai Futures Exchange (SHFE).
On the whole, while the Chinese market still continues to be indirectly under
the control of the state, it has made rapid progress towards emerging as a
powerful gold hub in the world. Its current status is largely aided by the (a)
establishment of exchanges which became regional leaders in price discovery
and trading volumes (b) creation of world class gold related infrastructure
(c) a favourable tax regime and (d) supportive policy for investment in gold
and gold linked products by households.

2.3 Singapore

Singapore traditionally has a strong cultural affinity with gold. People be-
lieve in using gold for preserving their capital. Singapore was an important
gold trading centre in the Far East until 1993, when an adverse tax regime
was implemented. Recently, Singapore has launched various initiatives to
regain its position as the leading regional player, given the strong demand
for physical gold in the East and South Asia. It offers a competitive tax
structure for gold trading and investment. It has exempted investment in
precious metals from good and services tax from October 2012. There are
no licensing requirements for import/export of metals which allows almost
free flow of precious metals through Singapore. It has set up world class
gold related infrastructure such as gold bullion manufacturing and refining.
It has set up all the essential elements linked to gold storage, trading and
refining, to become a regional gold hub. The Swiss-based refiner, Metalor
has set up a world-class gold refinery. The refinery, approved by the LBMA,
has an annual capacity of 150 tonnes. It primarily sources gold scrap from
8
Source: Understanding China’s Gold Market, World Gold Council Report, 2014.

5
jewellers in the region. A secure gold vault measuring 22,000 sq.m. is also
created next to Singapore’s Changi International Airport, called Singapore
Freeport. Major international banks, JP Morgan, Deutsche Bank, UBS and
ANZ, have set up gold vaults in Singapore. A number of secure logistics
providers, including Malca Amit, Brink’s and others operate the vaults in
the Singapore Freeport. They offer their rich experience and expertise in
precious metal-handling and offer custom-made logistical solutions for in-
vestments banks, private banks and bullion dealers. Singapore has also set
up a few gold dispensing automatic teller machines.
SGX (The Singapore Exchange) offers gold contracts for physical settlement.
The first such contract was launched in September 2014. In an attempt to
offer a benchmark price for 1 kg gold bars in the Asian region, Singapore
recently launched a wholesale kilobar contract on SGX, with a lot size of
25 kilograms of 99.99 per cent purity bars. The contract is targeted at
industrial users and institutions including central banks and aimed to set a
transparent price benchmark for physical delivery in Asia. 9 It is physically
settled on a 6-day rolling basis with SGX as the central clearing agency.
Four major international banks, JP Morgan, Standard Chartered, Standard
Bank and Bank of Nova Scotia are the market makers. While it was aimed
to become an alternative to the ‘London gold fix’, so far it has failed to
attract significant liquidity. The reluctance of banks to dis-intermediate the
kilobar market is speculated as one of the main reasons for the failure of the
contract. The intermediary driven OTC market is also claimed to have the
benefit of financing and delivery bundled into the transaction, unlike the
contract offered at the exchange. Further, the OTC market has the added
advantage of physical delivery at the customer location whereas the exchange
traded contract mandates delivery only at the designated warehouse.
Despite being neither a major producer nor a major consumer, Singapore
has emerged as a major gold hub by creating the necessary physical and
regulatory infrastructure. The presence of vibrant financial markets and
wealth management services seem to have contributed to the emergence of
Singapore as a gold hub. However, it appears that Singapore increasingly
faces tough competition from China, the largest producer and consumer of
gold. China seems to have the advantage of high domestic market demand
and stringent regulation which forces the gold demand to flow through the
exchange. While the retail contributes to a significant part of the demand
at the Shanghai exchange, Singapore appears to be largely reliant on the
wholesale demand.
9
Singapore to launch gold contract, Financial Times, June 25, 2014.

6
2.4 Dubai (UAE)

Dubai has been a gold trading centre for long in the Middle East. It acts as
major conduit between the producers in Africa and the consumers in Asia
and Europe. The proximity to top consumers, China and India, coupled
with a low tax regime and high quality infrastructure have helped Dubai
emerge as a major gold hub in the world. Nearly 40% of the physical gold
in the world passed through Dubai in the year 2014.10 The total value of
the gold traded in Dubai in the same year is about $75 billion.
The establishment of Dubai Multi Commodities Centre (DMCC) in 2002 to
provide the physical and market infrastructure for all the participants in the
gold value chain, gave a significant boost to the role of Dubai in world gold
trade. Dubai is also home to large gold refining capacity of more than 1,000
tonnes per annum. A large gold vault is set up by DMCC and operated
by Brink’s Global Services, as part of the gold ecosystem. Dubai has set
a standard in the delivery of small gold bars, targeted at retail demand,
which fully complements the London good delivery. It has set the standard
for 1 kg gold bars of 99.5% purity. The Dubai Gold and Commodities
Exchange (DGCX), set up by DMCC to specialize in gold trading, provides
a range of derivative contracts in gold. The derivative contracts include a
rupee denominated contract targeted at non-resident Indians.
DGCX plans to offer a physically settled dollar denominated gold spot con-
tract in 1 kg gold bars of 99.5% fineness. It intends to build on the thriving
OTC market for gold in Dubai. The exchange traded contract is claimed to
reduce counter party risk and would allow margins below the OTC market.
The trading is set to begin in early 2016 after its soft launch in the second
half of December 2015. The trading hours would start ahead of the Indian
bourses and last till 8pm Dubai time. The contract is targeted to establish
Dubai as the benchmark for the price of 1 kg gold bars.
Dubai also developed Dubai Commodities Receipt (DCR) against which
owners can obtain financing at attractive terms11 .
The gold business in Dubai has strong linkages with India. A number of
jewellers of Indian origin operate from Dubai, selling gold jewellery to the
non-resident Indians and collecting scrap gold for recycling. For a number
of large jewellery chains in India, their Dubai operations acts as the centre
for sourcing the gold required for the Indian operations.
Active jewellery trade, presence of refineries, a vibrant financial sector, and
the establishment of DMCC and DGCX have been identified with the evo-
lution of Dubai as a major gold hub in the world. Specifically, the success
10
Gold industry shifts east as Dubai plans huge refinery, spot contract, accessed at
http://www.reuters.com/article/emirates-dubai-gold-idUSL6N0NP03R20140505.
11
A revised recent version of the DCR is called a DMCC Tradeflow Warrants.

7
of Dubai is attributed to many factors such as:

• Fair and simple rules on gold import, export and trading

• Low tax base which exempts gold trade from VAT and direct taxes

• High quality infrastructure of refiners, storage and transport facilities

• Efficient financing arrangements for gold offered by many banks

Despite the volumes attracted by Dubai, there are reports of it becoming a

destination for conflict gold, from different zones in the world such as the
DR Congo. One of such incidents involved a major refiner who accounted
for nearly 45% of Dubai’s refining capacity.12 There is a view that the dual
role of DMCC as a regulator and as a trade promotion agency precipitates
some of the infringements.

2.5 Conclusions from Review of International Gold Exchanges

There is increasing demand for a benchmark for physical delivery of gold

based in Asia. The global gold market continues to shift from West to
East. China, Singapore and Dubai (UAE) have set up global scale physical
infrastructure required for refining, storage, transport and trading, and a
conducive regulatory infrastructure, to take early lead on this front in Asia.
Across the different international markets examined, Turkey, China, Dubai
(UAE) and Singapore, the gold exchanges and related infrastructure seem
to have significantly contributed to the development of an efficient market
for gold by way of:

• Efficient price discovery by channelling demand-supply information

into a central mechanism. Without the exchange the price related
information was fragmented across different channels with significant
arbitrage opportunities. The exchanges in these countries have by and
large synchronized the local prices with the international benchmark
prices.

• Assurance in the quality of gold for individual and institutional buy-

ers through standardization of quality with the help of support in-
frastructure such as LBMA accredited refineries, vaulting, storage and
financing facilities.
12
Sources: (1) City of Gold - Why Dubai’s first conflict gold audit never saw light of
the day, February, 2014 (2) Dubai Under New Scrutiny as Gold Trade Grows, The Wall
Street Journal, April 2014.

8
 • Active retail participation and use of gold bars and coins for investment
instead of jewellery. Substitution of investment physical gold with gold
linked financial products.

• Greater integration with other segments of financial markets through

gold leasing and lending.

• Acting as a channel for gold recycling by working through accredited

refineries. The recycled gold finds its way into the market through the
gold exchange.

The Asian countries which have emerged as major gold hubs largely seem
to have the following in common:

• A cultural affinity with gold and the use of gold as an investment

vehicle by households. A vibrant jewellery sector is present in most of
the countries.

• Active spot and derivative contracts in gold.

• A well-functioning financial system and its integration with the gold

markets.

• High quality gold infrastructure for refining, vaulting, and transporta-

tion.

• A favourable tax regime.

3 Gold Demand and Gold Markets in India

The demand for gold in India exceeded 800 tonnes in the year 2014 according
to the World Gold Council. India is the second largest consumer of gold in
the world after China. With only a tiny domestic production, India is largely
reliant on imports for meeting the domestic demand for physical gold. The
surge in gold demand invariably weighs down India’s balance of payment
situation and it often leads to government restrictions on gold imports.
Indians have a strong fascination for gold throughout history. It is an object
of display by way of jewellery for many Indians. Households regard gold as
a store of value and a hedge against inflation and currency depreciation.
Households and institutions in India are estimated to hold about 22,000
tonnes of gold. For households gold is somewhat a liquid asset with plenty
of opportunity for selling or pawning. A number of non-banking financial
companies specializes in issuing loan against gold. The liquidity of gold
jewellery increases its attraction as an investment vehicle among low and

9
medium income households, particularly for those less informed about other
financial investments. India has a vibrant jewellery sector well-known for
highly artistic hand-crafted jewellery.
The demand for gold in India can broadly be classified into demand for
gold as an investment, demand for gold in industry, central bank purchases,
and the demand for gold jewellery. The jewellery demand for gold is the
largest component of the demand, accounting for around 55% of the overall
demand in the first nine months of 2014. Gold in India is mostly imported by
entities like nominated banks/nominated agencies/ premier or star trading
houses/SEZ units/EoUs. It is mandatory for nominated banks and other
entities make available gold for domestic use only to the entities engaged in
jewellery business/bullion dealers and to banks authorised to administer the
gold deposit scheme against full upfront payment.
We have carried out a field survey to understand the gold sourcing practices
of Indian jewellers and some other key gold value chain partners. The survey
covered a representative sample of large, medium and small jewellers, refiners
and bankers. The key findings of the survey are summarised below:

3.1 Large jewellers with nationwide presence

The large jewellers appear to source their gold requirements from banks,
foreign refiners and local supply through recycling by retail customers. The
highlights of the different sources are as follows:

• Banks: Indian banks sell gold to large jewellers at internationally com-

petitive prices except the addition of a small commission.

• Refiners from abroad: On placing the customer order, gold price is

fixed between the customer and jeweller, often based on the LBMA
prices. Raw gold is purchased by the jeweller on the same day at prices
marginally below the LBMA prices. Sometimes, the required gold is
bought through an affiliated entity based abroad. Jewellers, often have
long term contracts with the suppliers to ensure timely delivery and
quality. Typically, once the order has been placed to the supplier, the
gold price risk is hedged through shorting of gold futures in the Indian
commodity exchange. The raw gold is processed and sold at the retail
outlets. The suppliers typically provide 90 days credit to the jeweller.

• Local customers: A non-trivial portion of the gold demand of the

large jewellers is met by local suppliers, who either recycle their gold
jewellery or secure them from undisclosed sources.

10
3.2 Medium sized jewellers

We classify those with annual turnover ranging from 100 kg - 1,000 kg as

medium sized jewellers. Most of them purchase gold from other large jew-
ellers or from resellers. Some of their source of supply include entities which
supply jewellery items directly by engaging artisans. 30-35% volume comes
from resellers, which includes supply by retail customers. They purchase
gold by paying cash and most of them hedge the gold. Jewellers who export
the products make 25-30% profit. Most of them are positively disposed to-
wards the exchange as they feel it would help to reduce the market power of
the big players in the sector. They also foresee that establishing an exchange
shall bring transparency and increase market share as unorganized players
shall be forced to follow industry standards.

3.3 Small jewellers

We classify those who sell than 100 kg a year as small jewellers. Most of
the small jewellers meet their requirements from local artisans or artisan’s
associations who supply them jewellery against order or purchase it directly
off-the-shelf. The metal prices are often linked to the gold prices quoted
by large jewellers in the locality. In most of the regions, there are no well-
established mechanisms to ensure homogeneity in the quality of the items
supplied. However, in Southern India it is common to test the quality of
supply through hallmarking agencies. Most of the small jewellers do not
obtain any credit or financing from their suppliers. Some of the large groups
engaged in the supply of jewellery often provide credit. Small jewellers do
not seem to procure any significant amount of gold from resellers.
There is lack of information about the source of supply of gold to the artisans
or artisan associations. It can be presumed that most of their procurement is
from resellers of gold in the local market. The small jewellers have expressed
keenness in procuring the gold from a centralised and transparent facility
like a gold exchange.

3.4 Refiners

The refiners largely import their gold from outside the country, mostly from
Africa via Dubai at 2% - 2.5% discount on the LBMA prices. They earn a
margin of about 0.5% on the locally sourced gold scrap. For the imported
quantity, they hedge both the gold and currency, gold by the refinery and
and currency by the end buyers. Financing the deal is a problem as Indian
banks are not as flexible the international banks. The proportion of locally
sourced gold ranges from 10-30%. The refiners have the view that a gold

11
exchange would help them to source at internationally competitive prices
within India.

3.5 Banks

The major public sector banks only import from Top-5 Banks worldwide
who quote their own rates. The import procedure typically involves, foreign
banks leasing gold to the importing Indian bank. At specified lease rates gold
is imported to the vaults of the local banks. Lease rentals are not changed
during the first month. The local bank later sells the gold to ultimate buyers.
Typical buyers are the big jewellers, star traders or bullion dealers. Sale of
the gold takes place at the rate specified by the selling bank. The local
banks get a commission of about $0.2 per ounce.
Banks report that in recent times with the direct import by the users, the
demand has declined significantly. Bank of Nova Scotia has its own business
channels established in India along with the appropriate licence and it does
not depend on local Indian banks for its trade.

3.6 Conclusions from the Field Survey

To understand the gold market in India and the scope for a Gold Exchange,
we conducted a field survey (described in the Appendix). The conclusions
from the survey are summarized below:

• Most of the demand for physical gold in India is routed through hubs
outside India, particularly Dubai.

• Large jewellers and refiners are able to procure gold at a discount to

the LBMA prices.

• Some of the large players have expressed keen interest in procuring gold
from a gold exchange set up in India, despite their current practice of
procuring directly from miners and traders in overseas gold hubs. At
one level, it may appear that large players with good access to a global
supply chain would have little incentive to trade on a local exchange.
But we have also observed a similar phenomenon in other commodities
(base metal and oil seeds for example) where large Indian players have
significant participation in Indian exchanges despite having access to
global markets. Basis risk, shorter lead times, price arbitrage, and
diversification of supply sources appear to motivate their participation
in Indian exchanges. Keeping this in mind, we do not disbelieve the
large players who have told us that they would welcome an Indian
gold exchange, and would source gold from there. Nevertheless, we

12
 have scaled down our estimates of likely trading volume on the spot
exchange to account for the possibility that the participation of the
large traders might be lower than their stated intention.

• The medium and small jewellers are often forced to dependent on large
players and face significant price disadvantage.

• The medium and small players have expressed willingness to source

gold through a gold exchange. They believe that the establishment of
a gold exchange would challenge the dominance of the large players in
the market.

• Resellers constitute a significant part of the demand from jewellers

and refiners. There is no transparency in the activities associated
with reselling of gold into the market.

• The quality of gold available and the price in various parts of the
country vary significantly. There is potential for standardization of
quality by creating the support infrastructure. A national level price
benchmark could help bring much needed transparency in the sector.

3.7 Brainstorming session

We have also conducted a brainstorming session on the idea of a gold ex-

change focusing on the following specific questions.

• Should India have a Gold Exchange?

• Is a Gold Exchange viable under current legal/tax regime?

• What critical legal/tax changes are required?

• What is the scope of services to be offered: exchange, vaults, bullion

hub?

• How large is the infrastructure requirement?

• Who are the ideal stakeholders for the project?

The session was well-attended by participants from the entire gold value
chain, including jewellers, refiners, logistics providers and banks.
The brainstorming session had the view that as gold does not have a stan-
dard price in India, a national-level spot exchange would benefit all stake-
holders by ensuring transparency in pricing and standardisation. It would
also help India evolve as a gold trading hub. The session envisaged a do-
mestic and an international exchange which would allow two-way trading in

13
physical gold and also have other derivative products for hedging purposes.
The exchange could utilize existing infrastructure and could be launched by
promoters who already have the experience of operating other exchanges in
India or abroad. The session had the view that banks should be allowed to
participate in gold trading.
The session evolved with the view that the exchange would be feasible with
(a) improved regulatory environment to create liquidity in the contracts (b)
lower or no commodity transaction tax and (c) a tax structure at par with
other international financial centres.
It had the view that the gold trade above a certain quantity could be com-
pulsorily routed through the exchange as practised in some other countries
to make the exchange initially viable.
The participants felt that it is ideal to have the following infrastructure as
part of the exchange:

• Gold vaulting facilities set up by experienced promoters

• Develop a distribution network to achieve T +1 delivery across 21

major locations in India

• Empanel refineries for quality assurance of gold and standardization

The common view during the session was that the exchange would be feasible
with a minimum trade quantity of about 100 tonnes. Given the annual
demand of about 1,000 tonnes in India, the threshold quantity appeared
feasible to achieve.

4 Setting up a Gold Exchange in India

4.1 Economic Viability

All stakeholders that we interacted with were supportive of the idea of a

gold exchange in India. But two segments stand out as beneficiaries of a
domestic gold exchange and are likely to use it extensively:

1. Medium size jewellers (100 − 1, 000 kg of annual turnover) currently

source their gold from large jewellers or from resellers. Medium size
jewellers believe that an exchange would give them a more level playing
field.

2. Refiners view the exchange as providing an attractive platform for

them to get better price realization.

14
An international exchange with a gold vault located outside the domestic
tariff area is attractive to a much large number of players because of the
ability to fund that gold inventory in global markets.
Looking to the future, there are signs of revival of gold mining in India,
decades after the closure of the old mines. If and when this happens, the
Gold Exchange would provide a vital venue for the mines to sell their gold.
Our assessment based on conversations with a wide variety of potential
stakeholders and participants is that if 10% of India’s gold imports flow
through the exchange, this 100 ton volume would provide the minimal liq-
uidity to sustain a contract. This minimal liquidity would attract larger
participation and snowball into a vibrant contract that becomes the domi-
nant forum for price discovery and for investment in physical gold.
Our assessment based on our survey is that this minimal initial volume
is eminently feasible because there are significant segments that are under
served by the existing market structure, and they would be keen on the
greater transparency afforded by the exchange.

4.2 Scope and Activities of Gold Exchange

The gold exchange should offer a wide range of contracts to meet the needs
of the gold industry:

Domestic Spot Gold Contract This gold contract would be based on

delivery in the domestic market – since this would be in the Domestic
Tariff Area (DTA), the gold price of this contract would be in Indian
rupees and would be inclusive of import duties. This contract would
be supported by a range of logistic facilities including:

• Gold vaulting facilities in the DTA

• T+1 delivery at the principal gold centres in India
• Gold assaying facilities

Global Spot Gold Contract This gold contract would be based on de-
livery outside the Domestic Tariff Area (DTA), and the gold price of
this contract would in US dollars and would not include import du-
ties. This contract would be supported by a range of logistic facilities
including:

• Gold vaulting facilities (offshore vault) provided by a globally

acceptable custodian outside the DTA preferably in the SEZ of
an International Financial Services Centre (IFSC). In the initial
stages, it is possible that some OTC gold players could manage
the physical gold more economically, but as the trading volume

15
 and financing activity scales up, the credibility of the vault oper-
ator would become more important.
• Facility to move the gold from the offshore vault into the DTA
quickly and smoothly on payment of import duties and compli-
ance with associated requirements.
• Ability to transfer the gold from the offshore vault outside In-
dia quickly and smoothly on the basis that the gold has not yet
entered the DTA.

Dore Swap Contract The Dore Swap Contract would meet the needs of
the growing gold refining industry in India by allowing refiners to hedge
their refining margins. The India Responsible Gold Policy discussed
below would be a critical element in the success of the Dore Swap
Contract.

Gold Lending and Borrowing Mechanism (GLBM) The GLBM would

serve many purposes:

• Link the spot gold contract with the forward and futures markets
in gold.
• Facilitate financing of gold inventories in the organized financial
sector.
• Shift some of the gold leasing activities currently undertaken out-
side India to the Indian markets.

4.3 Clearing and Settlement

The success of the global gold contracts requires globally credible clearing
arrangements. There are two possible choices for the clearing corporation:

1. A large global clearing corporation

2. A leading domestic clearing corporation

A separate clearing corporation only for the Gold Exchange or for the global
contract would not have the scale and resources to achieve global acceptance.
It would also be advantageous to provide facility for dematerializing the gold
held in the Exchange vaults.

16
4.4 Exchange Promoters and Stakeholders

Promoters of the exchange should be neutral players to ensure transparency

and integrity. Participants in the gold industry (like jewellers, refiners and
traders) would suffer from conflicts of interest in promoting and operating a
gold exchange. The neutrality requirement means that existing commodity
exchanges, stock/derivative exchanges, banks and other financial entities are
natural candidates for promoting a gold exchange in India.
There are major advantages in letting an existing exchange promote the
Gold Exchange as a segment within its range of activities:

• Globally, exchanges are consolidating across product segments, and

absent regulatory segmentation, all asset classes tend to trade on the
same exchange. One example is the merger of Turkey’s gold exchange
(IGE) with the Turkish stock and derivative exchanges to form BIST.
Similarly, the formation of the Singapore Exchange by the merger of
the stock exchange (SES) and the derivative exchange (Simex) created
a multi-asset exchange which now also offers a spot gold contract.

• The economic viability of a gold exchange is easier to establish if it is

a segment of a larger exchange which has already incurred the fixed
costs of operating a commodity exchange.

• Indian exchanges (stock, derivative and commodity) are all regulated

by the Securities and Exchange Board of India (SEBI) which has
achieved global acceptance as a credible regulator. This is especially
important for the success of the global gold contract.

• A single exchange trading domestic spot gold, global spot gold, gold
futures, and other elements of the gold complex of contracts would
facilitate price discovery, arbitrage (and potentially cross-margining).

While Indian commodity, stock and derivative exchanges are all potential
promoters of the Gold Exchange, an existing commodity exchange would
have the advantage of experience in managing the physical delivery which
is a complication that is not present in financial contracts. Based on our
discussions, we believe that Indian commodity exchanges are willing and
eager to launch the Gold Exchange.

4.5 Global Collaboration

The whole complex of domestic and global gold contracts would benefit
immensely from technical collaboration and partnerships (including minority
equity participation ) with established global players.

17
 • Partnership with gold markets in Singapore, London and Shanghai
would be beneficial in helping establish the Gold Exchange as an im-
portant Asian reference price for gold. Dubai is another possible part-
ner subject to appropriate due diligence.

• A minority equity participation by multilateral financial institutions

like the ADB and the BRICS bank would also establish the credibility
of the Gold Exchange in the global marketplace.

• Technical collaboration with professional bodies like the LBMA could

potentially help in contract design and delivery standards.

4.6 Governance

We would like to emphasize that governance is one of the key things that
an Indian Gold Exchange would bring to the table. Governance has several
aspects that are important in this context:

Responsible Gold Asia is the major consumer of gold in the world, and
ultimately, Asia must play the leading role in ensuring that its gold
purchases do not contribute to conflict, human rights abuses, terrorist
financing or money laundering. India with its democratic traditions
and common law systems has the potential to assume leadership in Re-
sponsible Gold in Asia. The Gold Exchange and its regulators need to
take the initiative in this regard. In an environment where some partic-
ipants have concerns about the quality of compliance with responsible
gold standards in Dubai, the opportunity for India is greater.

Gold Quality As India becomes a significant refiner of gold, it is essential

that it creates the domestic infrastructure to assure quality of gold at
all stages of the gold value chain. The Gold Exchange has a critical
role to play in this regard.

Risk Management, Clearing and Settlement In the context of high

profile failures in commodity exchanges in India and China in recent
years, it is essential that the Gold Exchange conforms to the highest
standards of risk management, clearing and settlement.

Regulation and Supervision The Gold Exchange should leverage upon

the credibility of India’s financial regulators to gain global acceptance.

4.7 Location

Based on our survey, the geographic location of the Exchange within India
is not a critical factor. Our respondents were of the view that with logis-

18
tic arrangements for T+1 delivery across 21 major locations in India, the
exchange can be anywhere in India.
As discussed in Section ??, the Gold Exchange would need gold vaults inside
and outside the DTA in close proximity to achieve the biggest gains from
the domestic and global spot gold contracts. This means that the Gold
Exchange must be located in or close to an SEZ which is the best location
for a vault outside the DTA. Most SEZs in India are manufacturing SEZs
which do not have the regulatory and operating infrastructure to support
the complex requirement of exchange trading. The only SEZs that have the
infrastructure for this are the financial services SEZs. These International
Financial Services Centres (IFSCs) have two big advantages:

1. A regulatory regime that provides global credibility, and

2. Sufficient exemptions from capital controls to make the global contract

feasible

4.8 Exchange Trading and Capital Controls

Within the constraints of capital control regulations, both the domestic and
global contracts on the Gold Exchange must be open to the widest range
of participants. Even if initially much of the participation might come from
domestic players, it is important to make the contracts attractive to foreign
participation to achieve greater liquidity and better price discovery. Clearly,
all domestic players should be allowed to trade the domestic gold contracts.
In the absence of capital account convertibility, it is not possible to open
up this contract to all foreign players. However, as in the stock market,
Foreign Portfolio Investors (FPIs) should be given access to this contract.
The participation rules for the domestic gold contracts could therefore be
as follows:

Domestic Participants Foreign Participants

All domestic entities Foreign Portfolio Investors
(jewellers, refiners, traders, (FPIs) on lines similar to
banks, financial institutions, stock markets
individual investors)

When it comes to the global contracts, clearly, there should be free access to
all foreign players. However, in the absence of capital account convertibil-
ity, there will have to be restrictions on participation by domestic players.
The principle should be that domestic players should have at least the same

19
level of access to the global contract as they have to exchanges located out-
side India. Participation in the global contracts could therefore be as follows:

Domestic Participants Foreign Participants

Domestic players who are All foreign participants and
allowed to trade or hedge in not just FPIs.
global markets in accordance
with FEMA.
Resident individuals within
the $250,000 limit under the
Liberalized Remittance
Scheme for investment
outside India.

4.9 Taxation

In many Asian countries like China and Singapore, investment grade gold
traded on the exchange is exempted from indirect taxes like VAT and GST.
This makes eminent sense for India as well because it is likely to be broadly
revenue neutral (if not revenue accretive) for the government:

1. The exchange traded gold leaves a clear trail that would reduce the
widespread evasion of taxes at the downstream stage. The revenue
lost from VAT/GST at the exchange could be more than compensated
by higher recovery of taxes at the point of sale to the end consumer.

2. Gold traded at the Exchange would attract CTT (Commodity Trans-

action Tax). Every gold bar that is delivered through the exchange
mechanism would typically have been traded several times on the Ex-
change without actual delivery. Since even non delivery trades would
attract CTT, the revenue loss from VAT/GST exemption would be
partially offset by this revenue gain. This logic is quite similar to
the logic for exempting long term capital gains on equity share trades
that have been subject to STT (Securities Transaction Tax). In prac-
tice, STT revenues gained have been more than the capital gains tax
foregone. The same is likely to happen here as well.

3. Over a period of time, as the Gold Exchange becomes a major vehicle

for investment flows into gold, large CTT revenues would flow to the
government from this route as well.

20
 4. Even in the unlikely event of a revenue loss from the VAT/GST ex-
emption, this would be well justified by the economic gains from the
Gold Exchange.

There is a demand from the industry for exemption from CTT (Commodity
Transaction Tax). This might be difficult for the government to accept
unless the entire STT/CTT regime is rolled back.

4.10 Gold Exchange and Gold Monetization

India has recently launched an ambitious programme for gold monetization

including Gold Bonds and Gold Deposits. Global experience indicates that
the Gold Exchange would help in this endeavour in many ways:

1. It would provide hedging mechanisms to the banks that offer gold

deposits and to the government for its Gold Bonds.

2. It would provide investment instruments for Gold ETFs which are also
useful methods of gold monetization.

3. By dematerializing the gold held in its vaults, it would create one more
vehicle for gold monetization.

4.11 Gold Exchange and the Balance of Payments

One of the concerns of the government in relation to gold has been the
adverse impact that the large gold imports have on the balance of payments.
The Gold Exchange is likely to have a favourable impact on the balance of
payments for several reasons:

1. The exchange would be able to prompt some of the refining related

value chain activities to get relocated to India due to centralized de-
mand from the gold exchange. For instance, instead of the import of
refined gold bars, gold dore bars could be imported directly from large
miners for local refining in India. The value addition created through
local refining would translate into saving of foreign exchange outflow.

2. Transparent prices at the exchange and the establishment of high qual-

ity refiners might prompt greater recycling of the gold stock in India.
Increased gold recycling would make India less dependent on the im-
port of physical gold, which will ease the pressure on the balance of
payments.

3. The spot exchange might also make it easier for upcoming gold mines
in India to sell their output, and thereby reduce gold imports.

21
 4. The spot exchange could also give a fillip to the gold monetization
schemes of the government which could also reduce the need for gold
imports.

5 Conclusion

A spot Gold Exchange in India is eminently viable and would help create
a vibrant gold ecosystem in India commensurate with India’s large share of
global gold consumption. The Gold Exchange would lead to efficient price
discovery, assurance in the quality of gold, active retail participation, greater
integration with financial markets, and greater gold recycling. The Gold
Exchange would also help in the gold monetization efforts of the government.
The Gold Exchange must set high standards of governance and aim at
achieving leadership in Asian gold markets. To this end, it must be pro-
moted by neutral players who do not suffer from conflicts of interest and
must be regulated by SEBI which is the regulator for stock, derivative and
commodity exchanges in India. It must also seek global partnerships and
collaborations to increase its global reach.
The gold exchange should offer a wide range of contracts to meet the needs
of the gold industry:

• Domestic Spot Gold Contract

• Global Spot Gold Contract denominated in US dollars based on deliv-

ery outside the Domestic Tariff Area (DTA)

• Dore Swap Contract

• Gold Lending and Borrowing Mechanism (GLBM)

A separate clearing corporation only for the Gold Exchange or for the global
contract would not have the scale and resources to achieve global acceptance.
A top global clearing corporation or a top domestic clearing corporation
would be preferred. It would also be advantageous to provide facility for
dematerializing the gold held in the Exchange vaults.
As in other Asian countries like China and Singapore, investment grade gold
traded on the exchange should be exempted from indirect taxes like VAT and
GST, but should be subject to Commodity Transaction Tax (CTT). This
proposal to levy CTT in lieu of VAT/GST is likely to be broadly revenue
neutral (if not revenue accretive) for the government.
A Gold Exchange located in an International Financial Services Centre
would offer the greatest benefits in terms of ability to offer domestic and

22
global gold contracts, gold vaults inside and outside the Domestic Tariff
Area, and ability to attract international participants. Within the con-
straints of capital control regulations, both the domestic and global contracts
on the Gold Exchange must be open to the widest range of participants.

23
Appendix: Participating Organisations in the Sur-
vey Interaction and Brainstorming Session

Sl.No. Category Location

Jewellers
1 Small Jeweller South India
2 Small Jeweller South India
3 Small Jeweller Western India
4 Small Jeweller Western India
5 Small Jeweller Western India
6 Medium-sized Jeweller Western India
7 Medium-sized Jeweller Western India
8 Medium-sized Jeweller South India
9 Large Jeweller South India
10 Large Jeweller Western India
11 Large Jeweller Doha
12 Large Jeweller Doha
13 Large Jeweller Dubai
14 Large Jeweller Dubai
15 Large Jeweller Dubai
16 Large Jeweller Dubai
Refiners
17 Refiner Western India
18 Refiner South India
19 Refiner Western India
20 Large refiner Dubai
21 Large refiner Dubai
22 Large refiner Dubai
23 Large refiner Dubai
Banks
24 Large PSU bank Western India
25 International Bank Western India
26 Large private sector bank Western India
27 Private sector bank Western India
28 Financial services infrastructure firm Western India
Gold logistics
29 Domestic gold logistics provider Western India
30 International gold logistics firm Western India
Exchanges and associations
31 Indian Bullion & Jewellers Association India
32 Gold exchange DMCC, Dubai
33 Commodities exchange India
34 World Gold Council India

24