Gold is booming, but EGRs aren’t: Why electronic gold receipts are struggling to attract investors despite market buzz

Electronic gold receipts (EGRs) have struggled to gain traction despite the strong popularity of gold among Indian investors. SEBI chairman Tuhin Kanta Pandey recently acknowledged that “EGRs haven't taken off in the expected way, but gold ETFs have,” highlighting the gap in adoption between the two products. He also pointed to a delivery-related issue with EGRs.

Market participants attribute the muted demand to a combination of low secondary-market liquidity, the cost and complexity of physical redemption, taxation and limited investor familiarity with the relatively new investment format.

Adhil Shetty, CEO, BankBazaar, said gold’s popularity does not automatically translate into demand for every investment format.

“Gold's popularity as an asset doesn't automatically transfer to a new format for holding it. EGRs are a relatively recent addition, backed by physical gold in accredited vaults, but distinct in structure and process from the ways investors have traditionally held gold. Two things factor into how investors evaluate this format, how easily an EGR can be bought or sold on the exchange, and the process involved in converting it into physical gold, which is routed through a broker and the vault manager and carries a 3 per cent GST. As with any new investment format, it naturally takes time for investors to build familiarity with how it works before adoption follows.”

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Liquidity remains a key hurdle

The lack of sufficient secondary-market liquidity is one of the biggest concerns. Market participants said relatively low trading volumes, wide bid-ask spreads and limited market-making activity can make it difficult to exit positions quickly, particularly for larger transactions.

Daily EGR trading volumes on the NSE and BSE are typically below ₹1 crore to a few crore rupees, compared with the significantly larger trading activity seen in gold ETFs and gold futures.

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GST adds to redemption cost

Taxation is another factor weighing on EGR adoption. While exchange-based trading of EGRs is GST-free, converting an EGR into physical gold attracts 3% GST at the time of withdrawal.

Market participants say this adds to the cost for investors who eventually want physical delivery. EGRs are classified as securities rather than commodities, which can also create complications around input tax credit for institutional investors and jewellers.

Physical conversion is cumbersome

Converting physical gold into EGRs can involve additional friction. The owner has to take the gold to a SEBI-registered vault manager, where it is assayed for purity and converted into an electronic receipt. This involves fees and can be inconvenient given the limited network of approved vault managers.

For jewellery owners, the economics can be less attractive as the making charges paid at purchase are not recovered when jewellery is converted into an EGR.

For EGRs to gain wider acceptance, market participants say improvements are needed in liquidity, physical conversion infrastructure and the overall investor experience. Until then, gold ETFs and physical gold retain a familiarity advantage among investors.

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