Bullion Certificate plan envisages setting up of autonomous authority

The Bullion Certificate Scheme (BCS) submitted to the ministry of finance and Reserve Bank of India (RBI) envisages setting up of an independent authority by the Act of Parliament.

This authority, to be set up with an initial corpus of Rs 100 crore, could act as the custodian for all gold and silver garnered under the scheme, fix rates and prices and arbitrate matters under dispute.

Speaking to Business Standard, Dinshaw J Dastur, the author of the scheme, said that the primary objective of the scheme is to back India's currency with bullion without increasing the money supply and to create a reserve against which the government could finance infrastructure projects, in particular the Garland Canal Project that will link the rivers.

Dastur said that if the scheme gets implemented and full immunity is provided to the identity of the investor in the BCS, value of Indian currency will match the price of bullion in certain span of time.

He specified that BCS will not create any inflationary pressure as all the hoarded currency mobilised under the scheme will be recirculated for bullion acquisition.

The authority to be set up under the scheme will have full jurisdiction on trading of all commodities, total control on export and import and levying duty on all commodities.

The authority could issue bullion certificate at a fixed rate of Rs 400 per annum for gold and Rs 70 for ten gm of silver, each paper carrying 4 per cent interest per annum.

These certificates could be tradable in open market or with the banks on any working day of the year for price of bullion on that day but not redeemable.

Further, the scheme has suggested that all banks including scheduled banks and all financial institutions will have to invest their reserves in bullion certificates and will act as satellite against for the so called authority.

Moreover, there will be no maturity date for redemption of the certificates as the scheme will operate in an open ended manner with value pegged to a specific exchange quote.

As an additional incentive, depositors in the scheme can pledge their bullion certificates as securities against borrowing from commercial banks, albeit no interest will accrue on such certificates.

However, banks should be allowed to lend only 25 per cent of the value of bullion deposit to the depositors while the rest must be earmarked for lending to infrastructure projects.

Funds obtained from spreads on lending can be utilised to buy more bullion and the authority could engage in trading in order to take advantage of pricing difference in India and abroad.

Justifying the advantages that will accrue to a bank, Dastur said, SLR and CRR requirements should not apply on these bullion deposits.

While banks could mobilise additional lending resource, there will be no cost of borrowing as it is the authority's obligation to bear the interest on such deposits.

Banks could charge up to 10 per cent per annum for loans against bullion certificate while for lending resources mobilised under the scheme against assets other than the these certificates, rates could go up to 14 per cent.

The scheme provides that bullion certificates with investments of undeclared currency of bullion could not be redeemed for three years but these could be pledged for a loan.