Yellow metal to be traded in paper form

The Union finance minister today announced that the Securities Exchange Board of India (Sebi) and the Reserve Bank of India (RBI) would workout the modalities for mutual funds to float gold-backed units which would be traded on exchanges.

These Gold Exchange Traded Funds (GETFs) will enable households to buy and sell gold in units for as little as Rs 100.

In fact, it was Benchmark Mutual Fund which first mooted a scheme of this sort around three years back but the idea did not find favour with RBI, as it felt that the prices of gold could be manipulated and it would destabilise the market. Sebi, incidentally, did not have any problems with the scheme.

Exchange-traded gold funds are a step in the direction of real estate funds and other commodity-backed funds.

Ashutosh Bishnoi, chief marketing officer at UTI Mutual Fund, said, "The necessary mechanism for this has to be put in place The first step in this direction should be to securitise gold as an asset since the funds cannot hold them in physical form."

He pointed out that the tax regime on gold - sales tax and octroi - will have to be amended since that was one of the major impediments in any gold transaction.

Further, gold depositories also needed to be set up, which will provide the receipts for such deposits.

According to bullion consultant Bhargava Vaidya of BN Vaidya and Associates, the commodity can be bought in paper form by investors in small units, similar to mutual fund units, at wholesale prices and kept with a depository like State Bank of India, Nova Scotia, or Mineral and Metal Trading Corporation.

These are fully security-backed and can also be sold to jewellers. "While import of gold has been liberalised for over 10 years now, this step is seen to channelise more usage of gold into the economy," Vaida said.

The ETF route is expected to see a wider acceptance once the varying sales tax rates in several states is done away with and value-added tax comes into effect on April 1, 2005.

Currently, Rajasthan is attracting 75 per cent of the Rs 40,000 crore bullion trade as it has implemented a green channel scheme where the sales tax on bullion trade would be between 3 paise and 10 paise (0.03 per cent and 0.1 per cent), based on the trader's turnover.

This is compared with a one per cent prevailing tax in other states.