Sovereign Gold Bond Scheme

[srikanthchowhan SIR IASGROUP]

Why in news?

The Gold Bond scheme has attracted enough gold in the society despite handsome interest rate.

Context: The government of India has announced that the first tranche of Sovereign Gold Bond scheme for the current year 2018-19 will shortly be opened for subscription.

 

About the Sovereign Gold Bond Scheme:

The sovereign gold bond was introduced by the Government in 2015. While the Government introduced these bonds to help reduce India’s over dependence on gold imports, the move was also aimed at changing the habits of Indians from saving in physical form of gold to a paper form with Sovereign backing.

What is the Sovereign Gold Bond Scheme?

• The government of India recently launched a Sovereign Gold Scheme to provide an alternate option when it comes to owning gold.
• This scheme aims to reduce the demand for physical gold, thereby keeping a tab on gold imports and utilising resources effectively.
• With the Reserve Bank of India issuing these gold bonds, it brings in transparency and trust, providing an avenue wherein people can own gold without having to worry about its storage or safety.

How does Sovereign Gold Bond Scheme operate?

• Under the Sovereign Gold Bond Scheme, the Reserve Bank of India will issue the bonds on behalf of the Government of India.
• The bonds will be sold at post offices and banks and issued in denomination of gram.
• They will issue these bonds on payment of money. Later on, the bonds will be connected to the price of gold.
• From one person, the Sovereign Gold Bond Scheme would accept a minimum investment of 2 gm gold and a maximum investment of 500 gm in a single fiscal year.

Why the scheme was introduced?

• The gold demand rises in times of uncertainty or high inflation.
• Gold demand is mostly met through imports
• Years of high imports are ones of high current account deficits which, in turn, have weakened the rupee.
• So, in FY12, when India imported $56.5 billion of gold, the current account deficit increased to $78.2 billion.
• It peaked at $88.2 billion or 4.8% of GDP in FY13, when India imported gold worth $53.8 billion.
• It is to reduce this huge import bill that, in November 2015, the government tried to introduce gold bonds.

Key facts:

Eligibility: The bonds will be restricted for sale to resident Indian entities, including individuals, HUFs, trusts, universities and charitable institutions.

Denomination and tenor: The bonds will be denominated in multiples of gram(s) of gold with a basic unit of 1 gram. The tenor will be for a period of 8 years with exit option from the 5th year to be exercised on the interest payment dates.

Minimum and Maximum limit: The minimum permissible investment limit will be 1 gram of gold, while the maximum limit will be 4 kg for individual, 4 kg for HUF and 20 kg for trusts and similar entities per fiscal (April-March) notified by the government from time to time.

Joint Holder: In case of joint holding, the investment limit of 4 kg will be applied to the first applicant only.

Collateral: Bonds can be used as collateral for loans. The loan-to-value (LTV) ratio is to be set equal to ordinary gold loan mandated by the Reserve Bank from time to time.

 

What were the shortcomings?

• Only 2% of the average gold consumption over the past five years or less than 6% of the average investment demand of gold has been substituted by gold bonds.
• This is because of the bad design of the product which did not take into account the reason people bought gold, apart from the anonymity.
• The bonds were bought/sold on the basis of the average price five days before the transaction.
• This ensured buyers/sellers lost out on the appreciation of gold.
• Similarly, there was a 5-year lock-in for the bond.
• Similarly to bring in market-makers to ensure greater liquidity for the bonds, they are listed on exchanges.
• It does not make sense to have a lock-in for the bonds.
• A more liquid market will ensure the bonds can be sold, but the lock-in will mean the price got for a sale will be discounted.

1. What is Sovereign Gold Bond (SGB)? Who is the issuer?

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.

2. Why should I buy SGB rather than physical gold? What are the benefits?

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.

3. Are there any risks in investing in SGBs?

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.

4. Who is eligible to invest in the SGBs?

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 and charitable institutions.

5. Whether joint holding will be allowed?

Yes, joint holding is allowed.

6. Can a Minor invest in SGB?

Yes. The application on behalf of the minor has to be made by his/her guardian.

7. Where can investors get the application form?

The application form will be provided by the issuing banks/SHCIL offices/designated Post Offices/agents. It can also be downloaded from the RBI’s website. Banks may also provide online application facility.

8. What are the Know-Your-Customer (KYC) norms?

Know-Your-Customer (KYC) norms will be the same as that for purchase of physical form of gold. Identification documents such as Aadhaar card/PAN or TAN /Passport / Voter ID card will be required. KYC will be done by the issuing banks/SHCIL offices/Post Offices/agents. No separate KYC will be needed for receiving bank’s own customers.