Union Cabinet approved Sovereign Gold Bonds Scheme to reduce dependence on physical gold

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Union Cabinet approved Sovereign Gold Bonds Scheme to reduce dependence on physical gold

Who: Sovereign Gold Bonds Scheme
What: Approved by the Union Cabinet
When: 9 September 2015
Why: To reduce dependence on physical gold

The Union Cabinet on 9 September 2015 gave its approval for the Sovereign Gold Bonds Scheme.

The purpose of the scheme is to reduce the demand for physical gold and to shift part of the estimated 300 tons of physical bars and coins purchased every year for investment into Demat (Dematerialised) gold bonds.

Features of Sovereign Gold Bonds Scheme

• Bonds will be issued on payment of money and would be linked to the price of gold.
• The sell would be restricted to resident Indian entities and each entity cannot buy more than 500 grams per person per year.
• The bonds will be issued in denominations of 2, 5 and 10 grams of gold or other denominations.
• 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.
• The bonds will be issued with a nominal rate of interest (which will be linked to international rate for gold borrowing) as decided by the government.
• The rate of interest on the bonds will be payable in terms of grams of gold. The interest will be calculated on 10000 at a certain per cent say 2 or 3 percent.
• On maturity, the investor receives the equivalent of the face value of gold in rupee terms.
• Bonds will be issued on behalf of the Government of India by the Reserve Bank of India (RBI).

• The bond will be marketed through post offices and by various brokers/agents who may need to be paid a commission (like for Kisan Vikas Patra).
• The price of gold may be taken from National Commodity and Derivatives Exchange (NCDEX) / London Bullion Market Association/RBI and the rupee equivalent amount may be converted at the RBI reference rate on issue and redemption.
• Banks/ Non-bank financial companies (NBFCs)/Post Offices may collect money / redeem bonds on behalf of government (for a fee, the amount would be as decided).
• 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.
• 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.
• These Bonds will be easily sold and traded on commodity exchanges
• Bonds can be used as collateral for loans. The Loan to Value ratio can be set equal to ordinary gold loan mandated by RBI from time to time.
• During 2015-16 financial year gold bonds equivalent of 50 tonnes of gold would be issued. Since the amount, around 13500 crore rupees, is not very high, it can be accommodated within the market borrowing programme for 2015-16.
• Since these bonds are part of the sovereign borrowing, they will be within the fiscal deficit target for 2015-16 and onwards.
• The amount received from the bonds will be used in lieu of government borrowing and the notional interest saved on this amount would be credited in an account Gold Reserve Fund.
• Gold Reserve Fund will be utilised to take care of the risk of increase in gold price that will be borne by the government.

Comment

The cabinet approval to the scheme is in tune with the Union Finance Minister Arun Jaitley’s 2015-16 budget speech.
Jaitley, on 28 Februay 2015, announced three major initiatives viz., Gold Monetisation Scheme, Sovereign Gold Bond Scheme and Indian Gold Coin to curb demand for physical gold.

Since most of the domestic demand for gold is met through imports, this scheme will, ultimately help in maintaining the country’s Current Account Deficit (CAD) within sustainable limits.

Gold Monetisation Scheme (GMS) is intended to replace both the gold deposit and gold metal loan scheme and to allow depositors to earn interest on their gold metal accounts jewelers to obtain loans.

Indian Gold Coin, which will carry the Ashok Chakra on its face, would help reduce the demand for gold coins and also help recycle the gold available in the country.