Explained: How India set up its first bullion exchange, and how will it work?

On July 29, Prime Minister Narendra Modi will launch India’s first bullion exchange — the India International Bullion Exchange (IIBX) — at Gujarat’s GIFT City (Gujarat International Finance Tec-City), India’s maiden International Financial Services Centre (IFSC) located between Ahmedabad and Gandhinagar.

The bullion exchange, which was announced in the 2020 Union Budget, has not only enrolled jewellers to trade on the exchange, but has also set up necessary infrastructure to store physical gold and silver.

Who can trade on the IIBX?

Qualified jewellers will be permitted to import gold through the IIBX.

To become qualified jewellers, entities require a minimum net worth of Rs 25 crore and 90 per cent of the average annual turnover in the last three financial years through deals in goods categorised as precious metals.

“For the first time in India, since the liberalisation of gold imports through nominated banks and agencies in the 1990s, the eligible qualified jewellers in India, as notified by International Financial Services Centres Authority (IFSCA), have been allowed to directly import gold through IIBX. This reform permits direct participation of qualified jewellers on IIBX for the purpose of importing gold,” an official said.

Apart from qualified jewellers, non-resident Indians and institutions will also be able to participate on the exchange after registering with the IFSCA. In the medium term, institutions such as Funds for Gold ETF are also expected to participate.

Further, jewellers will be able to transact on IIBX as trading members or as clients of a trading member. For becoming a trading member, a qualified jeweller may establish a branch or a subsidiary in IFSC (international financial services centre) and apply to the IFSCA.

A qualified jeweller based in India and not having physical presence in the IFSC may apply for a limited-purpose trading membership — where the entity can only trade on its own account and no client onboarding shall be permitted.

The IIBX will submit a report to IFSCA on a monthly basis providing details of transactions in bullion by qualified jewellers, including details of products traded, quantity, value, quantity of gold imported etc.

How many jewellers have so far registered on the exchange?

Currently, there are 56 jewellers registered on the IIBX. This includes the likes of Malabar Gold Pvt Ltd, Titan Company Ltd, Bangalore Refinery Pvt Ltd, RBZ Jewellers Pvt Ltd, Zaveri and Company Pvt Ltd, Sanghi Jewellers Pvt Ltd, among others. Trial transactions towards imports are currently being undertaken at the IIBX.

Will precious metals like gold be physically transported to GIFT?

A cumulative storage capacity for approximately 125 tonnes of gold and 1,000 tonnes of silver is planned at the GIFT City. Currently, Indian and global vault service providers have set up, or are in the process of setting up, vaulting facilities at the GIFT-IFSC. A storage facility is needed at the exchange for those who import in advance keeping upcoming demand or festival season in mind.

Further, the Ministry of Commerce and Industry, through a notification dated July 6, 2022, has stated that any unit in an SEZ (Special Economic Zone) which is permitted to store bullion for the purpose of issuance of bullion spot delivery contract and bullion depository receipts (BDR) for trading on IIBX, will be deemed as a unit in IFSC.

Therefore, the vaulting facilities at all the key bullion centres in India will act as the spokes to feed the bullion for the jewellery manufacturers and exporters across the country, while the IIBX at GIFT-IFSC will serve as a trading hub.

What products will be made available for trade initially?

Gold 1 kg 995 purity and gold 100 gm 999 purity with a T+0 settlement (100% upfront margin) are expected to trade at IIBX initially. The upfront payment is to negate speculation in the market and reduce risks. Later on, the products will be extended for T+2 (contracts with margin payments), where settlement of funds happens two business days after the order is executed.

A separate segment for UAE gold or gold with large bars (12.5 kg) may trade in future on the IIBX. Silver products will also be made available in later phases, sources said.

What are the advantages of having a bullion exchange in India?

The IIBX will be a gateway for bullion imports into India, where all bullion imports for domestic consumption shall be channelised through the exchange. In addition to providing a trading avenue to various participants, a bullion exchange will also offer the advantages of price discovery, transparency in disclosures, guaranteed centralised clearing and assurance of quality. A bullion exchange, apart from providing standardisation and transparent mechanism, will also be an important step towards financialization of bullion-based products.

Further, the IFSCA has ensured sourcing integrity of the bullion delivered through IIBX by mandating compliance to Organisation for Economic Cooperation and Development (OECD) Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas.

“This will lead to quality assurance and sourcing integrity. With the regulatory foundations in place, IFSCA intends to nurture a bullion ecosystem aimed at positioning India in the international markets, initially as a price influencer and ultimately as a price setter,” said an official from IFSCA.

How did the exchange take shape?

Union Finance Minister Nirmala Sitharaman had announced the setting up of IIBX at IFSC in Gujarat during her Budget speech in 2020. The MoU between Central Despository Services (India) Limited, India INX International Exchange (IFSC) Limited, Multi Commodity Exchange of India Ltd, National Securities Depository Limited and National Stock Exchange of India Ltd then helped create the holding company — India International Bullion Holding IFSC Ltd (IIBH). This holding company later operationalised IIBX, Bullion Clearing Corporation and Bullion Depository in IFSC.

The International Financial Services Centres Authority (Bullion Exchange) Regulations, 2020, was notified in December 2020 for trading of precious metals, including gold and silver. These regulations also cover bullion exchange, clearing corporation, depository and vaults.

Ashok Gautam took charge as the first managing director and CEO of IIBX in February 2022. His last workplace was IDBI Bank in Mumbai where he worked as executive director and head treasury of the bank. Gautam also has experience of working in Hong Kong and Singapore branches of State Bank of India.

Why was the project delayed?

The first pilot-run of the exchange was held in August 2021 and it was expected to go live in October 2021 when PM Modi was invited to launch it. However, the launch was postponed and rescheduled for the Vibrant Gujarat summit in January 2022. The launch was postponed for a second time as the summit could not be held due to Covid. The IFSCA had told The Indian Express in June 2022 that the earlier planned launches were postponed as they were awaiting some RBI guidelines related to importing of gold through the exchange.

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