While the space will be open to new players, existing exchanges can also have separate desks for these products.
By Madan Sabnavis
SEBI has made two interesting propositions for stock exchanges to consider. The first is a gold exchange and the other a social stock exchange. While it will be open to new players, existing exchanges can also have separate desks for these products, just like there are for SMEs or currency derivatives. Post the merger of SEBI and FMC, existing stock exchanges can also deal with commodities.
A spot gold exchange is a novel idea, where one can buy and sell gold on the exchange after having the gold deposited in vaults and getting an electronic gold receipt (EGR). Prima facie, this concept looks promising but has to compete with other gold investment options.
First, there are gold futures that are very liquid on MCX, with the option of delivery. Having a spot market is a blessing for the exchange as members can directly have a reference price and can seamlessly deal in both the segments. There can be an advantage here for the exchange that has a virtual monopoly in gold derivatives. Futures are more efficient than spot trade for investors as the margin to be placed is just around 5%.
Second, there are gold bonds issued by RBI which give one an interest of 2.5%. This gives one the benefits in price movement without having to hold on to the metal. This was the idea behind the Sovereign Gold Bond where the aim was to reduce physical demand through imports but provide the investment opportunity. The handicap is that it has a fixed tenure of eight years (can be redeemed early only after five years) with 4 kg being the limit on investment every year. This is a good product because when dealing with EGR one has to bear the vault costs, which does not hold, for the gold bonds.
Third, there are ETFs in gold where the fund manager looks after the NAV and regularly trades in gold while maintaining the reserves so that the holder can exchange the ETF units for gold, if needed.
The broader question is why should anyone come on to the gold exchange when there are other options? Gold futures deal in future price but follow the rules of spot trading where delivery is possible, though not efficient. And all this is happening in an environment where the traditional or conservative holder of gold does not want to lose sight of the metal and buys and holds jewellery in the locker. But exchanges cannot be left out and will surely rush to open these desks.
The social stock exchange is a novel concept in a way as this will be a platform for both debt and equity to be raised by a different set of companies (defined as for-profit or non-profit, but excludes regular corporates) where the money is used for social purposes as defined by SEBI and covers 15 areas. One may recollect the issuance of green bonds by banks where the funds were used for funding environment-friendly projects.
Here the concept has been broadened, more on lines with the ESG dictum, and hence there is a social good being accomplished. There is, of course, the question of how the use of these funds is monitored. There is a check being put by SEBI through audit processes which presumably will also lead to penalties being imposed in case of deviations.
The problem is that money is fungible and hence it becomes difficult to segregate the funding source to its use. When banks lend for a ‘green purpose’, they monitor end-use, just like they do for any loan; hence, in general, there is compliance. But when it comes to the market, such audits become more challenging especially if the entities are not corporates which have a predefined presentation of their accounts.
Here we are talking of bonds issued by hitherto unregulated entities. There could be considerable apprehension and it would be necessary to provide signals to the investing public through mandatory ratings for both equity and debt.
With a distinct thrust on ESG, the government can give a green push by providing tax breaks to investors of such bonds. This can help the public take part actively in a different kind of Green Revolution.
An independent economist and the author of ‘Hits & Misses: The Indian Banking Story’. Views are personal