Gold related Schemes Launched


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.

On November 5, 2015 Union government launched three gold related schemes viz. Gold Monetization Scheme, Sovereign Gold Bond Scheme and Gold Coin/Bullion Scheme.
I. Gold Monetisation Scheme (GMS), 2015
The GMS will replace the existing Gold Deposit Scheme, 1999. However, the deposits outstanding under the Gold Deposit Scheme will be allowed to run till maturity unless the depositors prematurely withdraw them.
Objective
The objective of introducing the modifications in the schemes is to make the existing schemes more effective and to broaden the ambit of the existing schemes from merely mobilizing gold held by households and institutions in the country to putting this gold into productive use. The long-term objective which is sought through this arrangement is to reduce the country’s reliance on the import of gold to meet domestic demand.
GMS would benefit the Indian gems and jewellery sector which is a major contributor to India’s exports. In fiscal year 2014-15, gems and jewellery constituted 12 per cent of India’s total exports and the value of gold items alone was more than $13 billion (provisional figures).
The mobilized gold will also supplement RBI’s gold reserves and will help in reducing the government’s borrowing cost.
The revamped Gold Deposit Scheme (GDS) and the Gold Metal Loan (GML) Scheme involves changes in the scheme guidelines only. The risk of gold price changes will be borne by the Gold Reserve Fund that is being created. The benefit to the Government is in terms of reduction in the cost of borrowing, which will be transferred to the Gold Reserve Fund.
The scheme will help in mobilizing the large amount of gold lying as an idle asset with households, trusts and various institutions in India and will provide a fillip to the gems and jewellery sector. Over the course of time this is also expected to reduce the country’s dependence on the import of gold. The new scheme consists of the revamped GDS and a revamped GML Scheme.
Revamped Gold Deposit Scheme
Collection, Purity Verification and Deposit of Gold under the revamped GDS:-
Out of the 331 Assaying and Hallmarking Centres spread across various parts of the country, those which will meet criteria as specified by Bureau of Indian Standards (BIS) will be allowed to act as Collection and Purity Testing 1 Centres for purity of gold for the purpose of this scheme. The minimum quantity of gold that a customer can bring is proposed to be set at 30 grains. Gold can be in any form (bullion or jewellery). The number of these centres is expected to increase with time.
Gold Savings Account:-
In the revamped scheme, a Gold Savings Account will be opened by customers at any time, with KYC norms, as applicable. This account would be denominated in grams of gold.
Transfer of Gold to Refiners:-
Collection and purity testing centres will send the gold to the refiners. The refiners will keep the gold in their ware-houses, unless banks prefer to hold it themselves. For the services provided by the refiners, they will be paid a fee by the banks, as decided by them, mutually. The customer will not be charged.
The banks will enter into a tripartite Legal Agreement with refiners and Collection and Purity Testing Centres that are selected by them to be their partners in the scheme.
Tenure:-
The deposits under the revamped scheme can be made for a short-term period of 1-3 years (with a roll out in multiples of one year); a medium-term period of 5-7 years and a long-term period, of 12-15 years (as decided from time to time). Like a fixed deposit, breaking of lock-in period will be allowed in either of the options and there would be a penalty on premature redemption (including part withdrawal).
Interest rate:-
The amount of interest rate payable for deposits made for the short-term period would be decided by banks on basis of prevailing international lease rates, other costs, market conditions etc. and will be denominated in grams of gold. For the medium and long-term deposits, the rate of interest (and fees to be paid to the bank for their services) will be decided by the government, in consultation with the RBI from time to time. The interest rate for the medium and long-term deposits will be denominated and payable in rupees, based on the value of gold deposited.
Redemption:-
For short-term deposits, the customer will have the option of redemption, for the principal deposit and interest earned, either in cash (in equivalent rupees of the weight of deposited gold at the prices prevailing at the time of redemption) or in gold (of the same weight of gold as deposited), which will have to be exercised at the time of making the deposit. In case the customer will like to change the option, it will be allowed at the bank’s discretion. Redemption of fractional quantity (for which a standard gold bar/coin is not available) would be paid in cash. For medium and long-term deposits, redemption will be only in cash, in equivalent rupees of the weight of the deposited gold at the prices prevailing at the time of redemption. The interest earned will however be based on the value of gold at the deposit on the interest rate as decided. 
Utilization:-
The deposited gold will be utilized in the following ways:-
(1). Under medium and long-term deposit:
(i). Auctioning.
(ii). Replenishment of RBIs Gold Reserves.
(iii). Coins.
(iv). Lending to jewellers.
(2). Under short-term deposit:
(i). Coins.
(ii). Lending to jewellers.
(3). Tax Exemption: Tax exemptions, same as those available under GDS would be made available to customers, in the revamped GDS, as applicable.
(4). Gold Reserve Fund: The difference between the current borrowing cost for the Government and the interest rate paid by the Government under the medium/long term deposit will be credited to the Gold Reserve Fund.
(5). Revamped Gold Metal Loan Scheme.
(6). Gold Metal Loan Account: A Gold Metal Loan Account, denominated in grams of gold, will be opened by the bank for jewellers. The gold mobilized through the revamped GDS, under the short-term option, will be provided to jewellers on loan, on the basis of the terms and conditions set-out by banks, under the guidance of RBI.
(7). Delivery of gold to jewellers: When a gold loan is sanctioned, the jewellers will receive physical delivery of gold from refiners. The banks will, in turn, make the requisite entry in the jewellers’ Gold Loan Account. Interest received by banks: The interest rate charged on the GML will be decided by banks, with guidance from the RBI.
(8). Tenor: The tenor of the GML at present is 180 days. Given that the minimum lock-in period for gold deposits will be one year, based on experience gained, this tenor of GML may be re-examined in future and appropriate modifications made, if required.
 
II. Sovereign Gold Bond (SGB)
The SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of Government of India.
The quantity of gold for which the investor pays is protected, since he receives the ongoing market price at the time of redemption/ premature redemption. The SGB offers a superior alternative to holding gold in physical form. The risks and costs of storage are eliminated. Investors are assured of the market value of gold at the time of maturity and periodical interest. SGB is free from issues like making charges and purity in the case of gold in jewellery form. The bonds are held in the books of the RBI or in demat form eliminating risk of loss of scrip etc.
There may be a risk of capital loss if the market price of gold declines. However, the investor does not lose in terms of the units of gold which he has paid for.
Persons resident in India as defined under Foreign Exchange Management Act, 1999 are eligible to invest in SGB. Eligible investors include individuals, HUFs, trusts, universities, charitable institutions, etc.
The Bonds are issued in denominations of one gram of gold and in multiples thereof. Minimum investment in the Bond shall be two grams with a maximum buying limit of 500 grams per person per fiscal year (April – March). In case of joint holding, the limit applies to the first applicant.
Objective
 Need for a Sovereign Gold Bond 
The main idea is to reduce the demand for physical gold.Ø  Shift part of the estimated 300 tons of physical bars and coinsØ purchased every year for Investment into ‘demat’ gold bonds.
Bonds will be issued on behalf of the Government of India by RBI. o Issuing agency will need to pay distribution costs and a sales commission to the intermediate channels, to be reimbursed by Government. The bond would be restricted for sale to resident Indian entities. The cap on bonds that may be bought by an entity would be at a suitable level, not more than 500 grams per person per year.
Features
The Government will issue bonds with a nominal rate of interest (which will be linked to international rate for gold borrowing). An indicative lower limit of 2% may be given but the actual rate will have to be market determined. On maturity, the investor receives the equivalent of the face value of gold in Rupee terms. The rate of interest on the bonds will be payable in terms of grams of gold. The interest will be calculated on 10,000 at a certain per cent say 2 or 3%. o The price of gold may be taken from NCDEX/ London Bullion Market Association/RBI and the Rupee equivalent amount may be converted at the RBI Reference rate on issue and redemption. Banks/NBFCs/Post Offices may collect money / redeem bonds on behalf of government (for a fee, the amount would be as decided). o The bonds will be issued in denominations of 2, 5, 10 grams of gold or other denominations. o The tenor of the bond could be for a minimum of 5 to 7 years so that it would protect investors from medium term volatility in the gold prices. Since the bond will be a part of the sovereign borrowing, these would need to be within the fiscal deficit target for 2015-16 and onwards. o Bonds to be used as collateral for loans. The Loan To Value ratio be set equal to ordinary gold loan mandated by RBI from time to time. o Bonds to be easily sold, traded on commodity exchanges. o KYC norms to be the same as that for gold. o Bonds to have a sovereign guarantee. o Capital gains tax treatment will be the same as for physical gold. This will ensure that an investor is indifferent in terms of investing in these bonds and in physical gold- as far as the tax treatment is concerned. This is still under examination.
Hedging
 The agency issuing the Sovereign Gold Bonds will be running a price risk on the amount of bonds issued. The price risk will comprise the price of gold in USD and the USD/INR exchange rate risk. Hedging of this risk is expensive and since the agency is the sovereign, and the amounts expected may not exceed 50 tonnes in the first year, may not hedge it. However, it should be cognizant of the existence of this risk. o Upside gains and downside risks will be with the investor and the investors will need to be aware of the volatility in gold prices. o The government would bear the risk of gold price movement on issuances.

III. Gold Coin/Bullion Scheme
The Indian gold coin & bullion is a part of the Gold Monetisation Programme. The coin is the first  ever national gold coin minted in India and have the National Emblem of Ashok Chakra engraved  on one side and Mahatma Gandhi on the other side . Initially the are available in denominations of 5 and 10 grams. A 20 gram bullion will also be available. Initially, 15,000 coins of 5gm, 20,000 coins of 10 gm and 3,750 of  bullions of 20 gm  have been made available through MMTC outlets. The Indian Gold coin & bullion is unique in many aspects and carries advanced anti-counterfeit features and tamper proof packaging.
The Indian Cold coin & bullion are of 24 karat purity and 999 fineness. All coins & bullion are hallmarked as per the BIS standards.



Sunday, 22nd Nov 2015, 10:43:45 AM

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