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Date: 29 July 2022
Venue: Gujarat International Finance Tec-City (GIFT) in Gandhinagar
A landmark event is about to unfold in the city of Gandhinagar, Gujarat. The first-of-its-kind India International Bullion Exchange (IIBX) is about to be launched in a glittering ceremony.
Two friends, Tejas, a bullion dealer and Ravi, a reporter, both based out of Gandhinagar, are invitees and are on their way to witness the special inaugural event to be launched under the auspices of PM Shri Narendra Modi.
While both are excited to reach the venue on time, Ravi has a few queries as to the idea behind IIBX and the exact benefits that would be realised, going forward.
Along the way, Ravi clarifies his queries from Tejas. Let’s read on to find out about their conversation and in the process, we too would get to know all about IIBX.
Ravi: Kem Cho Tejas?
Tejas: I’m good. Thanks Ravi. Tame Kem Cho?
Ravi: I’m good, too. Thanks, Tejas. I was wondering if you could help me understand a bit more about IIBX and its benefits.
Tejas: Sure Ravi. Happy to help. Go ahead and ask me your queries.
Ravi: What does bullion mean?
Tejas (searches on his smartphone and shows the phone screen to Ravi): Hey, look at this. From this pic, it is evident that bullion is different from gold ornaments and gold jewellery that are commonly purchased by families and households across India.
Bullion is high purity physical gold that is maintained in the form of bars, coins or ingots. It may be used as legal tender and is often held as reserves by central banks, including RBI. Bullion is also held by institutional investors.
Ravi: Ok. Why is there a need for a bullion market in the first place?
Tejas: Generally, any commodity of value would tend to have a market comprising buyers and sellers. Markets aid in fair price discovery supported by supply-demand dynamics.
Similarly, a bullion exchange is a market that enables buyers and sellers to trade in gold and silver as well as related derivative instruments.
Further, these bullion markets are mostly over-the-counter (OTC) markets, where the dealings are in actual physical gold and silver.
Ravi: Interesting. So, if there are already such exchanges existing, why is the IIBX being launched?
Tejas: India is the 2nd largest gold consumer in the world. The World Gold Council estimates that gold demand from India would stabilize at 800 tons in 2022.
Thus, it is imperative that we should have our own gold bourse that is based out of India.
- IIBX is India’s 1st global gold exchange that would accelerate the emergence of a regional bullion hub whereby eligible can directly import the yellow metal. This is a sea change from the hitherto scenario where only certain banks and select agencies nominated by RBI were allowed to import gold.
- IIBX would attract gold dealers, refineries and foreign banks to trade in the precious metal.
- The widening of the importer base would enable gold imports in an efficient and transparent manner.
- The launch is expected to result in the rationalisation of gold prices that would be ultimately favourable for end users.
Ravi: A world of advantages indeed. How will the trading in gold be carried out?
Tejas: The trade will be in the form of bullion depository receipts. Being an international exchange, all contracts are traded, listed and settled on the IIBX in US Dollars.
Ravi: What quantities of gold would be traded and what would the settlement period look like?
Tejas: Initially, one kg of 995 purity gold and mini gold in 100gms of 999 purity grade would be traded at IIBX.
The settlement would be T+0 i.e. trades would be settled and closed within the same evening with a 100 per cent margin.
Ravi: That’s pretty fast. What about the imported gold quality? How would the quality be verified?
Tejas: In both types of gold fineness, it is mandated that the imported gold comprises serially numbered gold bars supplied by LBMA (London Bullion Market Association) approved suppliers or suppliers who are approved by IIBX.
In all cases, the suppliers’ quality certificates need to be submitted. The imported gold would then be stored with nominated vault managers.
Ravi: Who operates the vaults?
Tejas: As per media reports, the exchange will have three vaults.
The vaults would be run by Sequel Global (ready to use and IFSC approved), Brinks India (ready to use and awaiting approval) and the third is currently under construction.
Ravi: How would India, as a nation, stand to benefit from the launch of IIBX?
Tejas: As the bullion ecosystem becomes mature and India becomes a regional bullion trading hub, our nation would transform from a price influencer to a price setter in the international market.
The following are the expected benefits:
- Standardization of gold prices in India: Currently gold prices vary from city to city in India. Since all the bullion imports for domestic consumption would be routed via IIBX, the gold prices would gradually attain uniformity.
- Bargaining power: IIBX is expected to make it easier for bullion dealers and jewellers to trade in gold. This would empower participants with enhanced price negotiation strength.
- Enhanced transparency: The technology-powered solutions provided by IIBX would bring greater transparency in the trading of precious metals.
- Broadening direct access to gold: Indian bullion market would facilitate qualified jewellers to directly import gold, thus resulting in an organized structure and gold financialization via an exchange mechanism.
- Assured quality: Towards ensuring sourcing integrity of bullion delivered through IIBX, IFSCA has mandated compliance to (OECD) Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas.
- Deepening of bullion market: IIBX would enable bullion trading, encourage transparent disclosures and guarantee centralised clearing.
Ravi: Who regulates IIBX?
Tejas: The International Financial Services Centres Authority (IFSCA) is the official regulator of India International Bullion Exchange (IIBX).
GIFT City is the location of India’s first International Financial Services Centre (IFSC). India’s Finance Minister Nirmala Sitharaman had already announced the establishment of India's first bullion exchange (IIBX) during her Union Budget 2020-21 speech.
Ravi: Who are the promoters of IIBX?
Tejas: IIBX is promoted by institutional market investors comprising India INX, CDSL, NSE, NSDL and MCX.
Ravi: When did the idea behind setting up the IIBX come up?
Tejas: The Niti Aayog, way back in 2018 had suggested the setting up of bullion spot exchanges.
FM Nirmala Sitharaman in the 2020-21 Union Budget announced the establishment of IIBX and notified the related regulations in Dec 2020.
A holding company named India International Bullion IFSC Limited was created that was responsible for starting the functioning of the bullion exchange, operationalising the clearing process and setting up a bullion depository in GIFT City.
Ravi: Currently, who all are eligible to become IIBX members?
Tejas: Qualified jewellers, Non-Resident Individuals (NRIs), foreign bullion suppliers following the OECD guidelines, and public and private firms are eligible to become members of the IIBX.
Ravi: Who would be counted as an eligible jeweller?
Tejas: RBI has issued guidelines to qualify as an eligible resident jeweller to import gold through IIBX.
A qualified jeweller needs to have a minimum net worth of Rs 25 crore and 90 per cent of the average annual turnover in the previous three financial years through deals in goods categorised as precious metals.
The qualified jeweller will be able to sell and buy gold and silver in the bourse after registration as a trading partner.
Ravi: As of date, how has the response been? How many jewellers have registered themselves?
Tejas: As per official numbers, 64 qualified jewellers have come onboard with several more applications in the pipeline.
To encourage participation by jewellers, the trades would be exempt from local duties, except in cases where goods are moved outside the city.
In other words, being a free trade zone, no duty will be paid. IIBX has set up a robust infrastructure to store physical gold as well as silver.
Ravi: That’s quite a good number, for starters. Would only gold be traded or also other precious metals?
Tejas: Currently, gold is being traded. However, there are plans on the anvil to allow silver trading on the exchange in the future.
Gold holds a special place as a valued asset amongst Indians. As per estimates, Indian households collectively own a whopping 25,000 tonnes of precious metal.
Besides being a symbol of wealth and prosperity, gold is also seen as a harbinger of good fortune. The gifting of gold is considered auspicious during religious festivals and weddings. Gold is also passed down generations as a family heirloom.
Ravi: True. Gold is special, without a doubt. Is the exchange only for resident Indians?
Tejas: IIBX is also keen to attract NRIs living across the globe, who would like to include bullion holdings within their investment portfolio.
Towards this end, the exchange has tied up with vault service companies offering competitive prices for physical gold storage.
Owing to the competitive pricing on IIBX, international players would prefer to use the vaulting services.
Ravi: How will the entire process work?
Tejas: The imported gold would be stored at an IFSC-approved vault.
After this, a bullion depository receipt would be issued and the gold would be ready for trading. Since IIBX is a spot exchange, all open positions would be marked for delivery at the end of the day itself.
Ravi (grins and gives a thumbs up): Wow. That was amazing. Thanks for sharing all this info with me. You have quite a lot of knowledge about the gold market and its workings.
Tejas (grins and reciprocates with a handshake): No problem. We have reached our destination. Let’s go inside and grab a seat.
Note: Names of characters ‘Tejas and Ravi’ are fictional.
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