View: As IIBX gains traction, price-rigging in the precious metals market should become a thing of the past

Every once in a while, a market infrastructure institution that can achieve a sea change in the way an industry functions gets its running legs. The launch of the India International Bullion Exchange (IIBX) in GIFT (Gujarat International Finance Tec) City, Ahmedabad, tomorrow could well be one such institution.

IIBX has been conceptualised to act as a gateway to the global market for not just importing gold but other commodities as well. But we should see it bring a fundamental change in the way gold markets operate in India and maybe even in the world.

25 years ago, nominated banks and agencies were allowed to canalise gold to the domestic market through the consignment route. In a consignment model, the overseas supplier, upon receiving indent from a licensed importing bank, brings gold into the country on payment of customs duty by the importing bank. The stocks are vaulted across India with the authorised vault manager by suppliers, while the pricing of bullion is expected within 90 days. This service has a cost, which the domestic bank would have added to the premium charged to the customer.

Effectively, when the end customer buys gold from bank, she would pay $3-4 an ounce more than the benchmark London Bullion Market Association (LBMA) price. A jewellery retailer would now save on the financing cost that is related to the consignment import, insurance and client maintenance costs that are hidden in the premium, in addition to a bilaterally decided supplier premium.

With IIBX, the conventional way of doing business gets disrupted. More margin moves into the hands of the end user. For the overseas supplier, the gold will be with a regulated vault manager, and with recourse to action devoid of any cost if the gold is not sold in India.

Through the disintermediation by facilitating transaction through an anonymously traded exchange platform, bullion is made available across special economic zones (SEZs) at International Financial Services Centres Authority (IFSCA)-approved vaults. This means the growth of IIBX is not just limited to GIFT City but across jewellery manufacturing hubs nationwide.

The qualified jeweller allowed to import gold through IIBX, or a jeweller who is a client of an IIBX member, can view the available stock and place the order. This shall nudge jewellers towards just-in-time inventory management. It will also result in greater transparency in pricing, and order sequencing, thereby removing any room for unfair preference by supplier, importing or logistics agency.

Such transparency has been made possible by the creation of bullion depository receipts (BDR) that are issued against gold deposited in the IIBX vaults for listing and trading. BDRs are designed to be unique to each bar, and is extinguished as it exits the IIBX vault towards delivery to the customer in the domestic area or exported, or for moving to any accredited IIBX vault.

This process ensures that the refined bars that enter the domestic market are all standardised bars of global acceptance and certified for responsible sourcing, a condition currently unavailable. A world-class assay lab within the IFSC zone adds trust to this ecosystem.

Today, even if 1 kg gold bars in Hong Kong are, relative to the global benchmark, at discount, while Indian prices are at premium, neither the end user in India will benefit from it nor will the supplier in Hong Kong be able to sell at a better price. On IIBX, the supplier as a client could look at India as another avenue to sell his gold instead of shipping it to London. Indian refiners with global accreditation should see this as an opportunity to explore toll refining and supplying to IIBX. Effectively, India will be supplying to both domestic and international markets while creating jobs here.

Over the period India considers full convertibility, it should have the necessary infrastructure that supports refining domestic scrap gold and exporting it. It is important to start working in that direction by at least allowing exports of 200 tonnes a year. IIBX should have mechanisms ready by creating a vibrant lending and borrowing market. It could grow into one of the largest vaulting hubs, globally servicing central banks, financial institutions, family offices and retail investors. It can become the medium for exporting domestic refined bullion bars.

As IIBX gains traction, price-rigging in the precious metals market should become a thing of the past. It is time the largest consuming centres rethink their benchmarks and move away from paper-traded opaque OTC (over-the-counter) markets and derivatives exchanges.

Sahay is chairperson, and Nambiath is head, India Gold Policy Centre, Indian Institute of Management Ahmedabad

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