 "Govt proposes to raise Rs 13,500 crore by sovereign gold bonds")
The government proposes to issue gold bonds with a sovereign guarantee to divert investment demand for physical gold to financial instruments, giving returns more than the gold price, as interest will also be paid.
According to the scheme, investment and redemption can be made by paying money but it would be linked to the gold price. The government expects the scheme to rake in about Rs 13,500 crore, which is equivalent to 50 tonnes of gold.
The government has said it is considering to provide capital gains tax treatment same as for the physical gold. While the gold price rise and fall benefit will be passed on to the investors, the Reserve Bank of India (RBI), the bond issuing agency, will not have to bear the price risk, or hedge it, as “the government would bear the risk of gold price movement on issuances”.
According to the draft outline issued on Thursday, the government proposes to shift part of the estimated 300 tonnes of gold bars and coins, purchased every year for investment into ‘demat’ gold bonds, into the scheme. Finance Minister Arun Jaitley had mentioned about the sovereign gold scheme and gold monetisation scheme in his Budget speech this year. The draft of the monetisation scheme was issued last month. The schemes were aimed at reducing gold imports.
Only resident Indians are eligible to invest in sovereign bonds. The government will fix a cap, which will not be more than 500 a year for a person, said the draft.
Generally, for investing in gold, one has to buy physical gold that is imported. Even gold exchange traded funds have to cover sale of units by buying equivalent amounts of gold. But the proposed bonds will be transacted in cash and there is no need to cover it up with physical gold.
“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 two per cent 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 two or three per cent,” said the draft.
At present, gold on lease in the international market is available at an interest of around 1.20 per cent.
Since the maturity redemption will be in gold, investors will get gold price return and interest also. However, if the price of the yellow metal falls, investors will have to bear the loss but interest will still be paid to them, which makes the scheme attractive than investing in physical gold. Another attractive feature of the scheme is that the bonds will be in demat format and hence storing is not a problem.
The government proposes to take the price of gold for maturity redemption from NCDEX/London Bullion Market Association/RBI and the rupee equivalent amount may be converted at the RBI reference rate. Banks/non-bank financial companies/post offices may collect money/redeem bonds on behalf of the government for a fee. The bonds are proposed to be issued in denominations of two, five and 10 grams of gold, or other denominations, and the tenor of the bond could be for a minimum of five to seven years, said the draft.
Bonds can 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 and these bonds will be transferable and also traded on commodity exchanges.
These bonds will be marketed through post offices and by various brokers/agents. Since the bonds will be a part of the sovereign borrowing, these would need to be within the fiscal deficit target for 2015-16 and onwards.
According to the scheme, investment and redemption can be made by paying money but it would be linked to the gold price. The government expects the scheme to rake in about Rs 13,500 crore, which is equivalent to 50 tonnes of gold.
The government has said it is considering to provide capital gains tax treatment same as for the physical gold. While the gold price rise and fall benefit will be passed on to the investors, the Reserve Bank of India (RBI), the bond issuing agency, will not have to bear the price risk, or hedge it, as “the government would bear the risk of gold price movement on issuances”.
According to the draft outline issued on Thursday, the government proposes to shift part of the estimated 300 tonnes of gold bars and coins, purchased every year for investment into ‘demat’ gold bonds, into the scheme. Finance Minister Arun Jaitley had mentioned about the sovereign gold scheme and gold monetisation scheme in his Budget speech this year. The draft of the monetisation scheme was issued last month. The schemes were aimed at reducing gold imports.
Only resident Indians are eligible to invest in sovereign bonds. The government will fix a cap, which will not be more than 500 a year for a person, said the draft.
Generally, for investing in gold, one has to buy physical gold that is imported. Even gold exchange traded funds have to cover sale of units by buying equivalent amounts of gold. But the proposed bonds will be transacted in cash and there is no need to cover it up with physical gold.
“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 two per cent 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 two or three per cent,” said the draft.
At present, gold on lease in the international market is available at an interest of around 1.20 per cent.
Since the maturity redemption will be in gold, investors will get gold price return and interest also. However, if the price of the yellow metal falls, investors will have to bear the loss but interest will still be paid to them, which makes the scheme attractive than investing in physical gold. Another attractive feature of the scheme is that the bonds will be in demat format and hence storing is not a problem.
The government proposes to take the price of gold for maturity redemption from NCDEX/London Bullion Market Association/RBI and the rupee equivalent amount may be converted at the RBI reference rate. Banks/non-bank financial companies/post offices may collect money/redeem bonds on behalf of the government for a fee. The bonds are proposed to be issued in denominations of two, five and 10 grams of gold, or other denominations, and the tenor of the bond could be for a minimum of five to seven years, said the draft.
Bonds can 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 and these bonds will be transferable and also traded on commodity exchanges.
These bonds will be marketed through post offices and by various brokers/agents. Since the bonds will be a part of the sovereign borrowing, these would need to be within the fiscal deficit target for 2015-16 and onwards.