Cabinet clears gold bond, monetisation schemes

The union cabinet today approved the Gold Bond and Gold Monetisation schemes, which are expected to help reduce physical holding of the precious metal and mobilise idle gold lying with households, temples and trusts for productive use.

India is estimated to have 20,000 tonnes of domestic stock of gold, which, as finance minister Arun Jaitley stated in his budget speech, is mostly neither traded nor monetised. If the schemes help to mobilise at least a 10 per cent of the idle gold, it would help bring 2,000 tonnes of gold into the open market, to be utilised by the jewellery industry.

The scheme will simultaneously help in reducing the demand for physical gold by shifting a part of the estimated 300 tonnes of physical bars and coins purchased every year for investment into gold bonds.

Since most of the demand for gold in India is met through imports, this scheme will, ultimately, help in maintaining the country's current account deficit within sustainable limits.

''It is safer and economically more stable to go under both these schemes,'' the finance minister said after the cabinet meeting.

Gold bonds will be issued in 2, 5 and 10 grams or other denominations and the tenor of the bond could be for a minimum of 5-7 years so that it protects investors from medium-term volatility in gold prices, Jaitley said.

The scheme will have an annual cap of 500 grams per person and such bonds would be issued for a period of 5-7 years.

''The cabinet today cleared the Gold Bond scheme. Under this scheme instead of buying physical gold, Indian residents can buy the gold bonds,'' Jaitley said.

The Budget 2015-16 had proposed the launch of a Sovereign Gold Bond (SGB) scheme to develop a financial asset as an alternative to gold.

As regards the Gold Monetisation Scheme, the minister said people holding idle gold can deposit it in banks for either short, medium or long term.

''This is not a black money immunity scheme and normal taxation laws would be applicable,'' Jaitley said when asked if this was an immunity scheme.

He said around 1,000 tonnes of gold is imported annually and people hold such quantum of idle gold just for investment purpose every year.

By taking advantage of gold monetisation scheme, people can deposit idle gold with authorised agencies and take advantage of the price escalation of gold as well as earn interest on the deposit, he said.

The issuance of the Sovereign Gold Bonds will be within the government's market borrowing programme for 2015-16 and onwards. The actual amount of issuance will be determined by RBI, in consultation with the finance ministry.

The risk of gold price changes will be borne by the Gold Reserve Fund that is being created.

The benefit to the government is in terms of reduction in the cost of borrowing, which will be transferred to the Gold Reserve Fund.

The salient features of the scheme are:

• Sovereign Gold Bonds will be issued on payment of rupees and denominated in grams of gold;
• Bonds will be issued on behalf of the Government of India by the RBI, so that the bonds will have a sovereign guarantee;
• The issuing agency will need to pay distribution costs and a sales commission to the intermediate channels, to be reimbursed by the government;
• The bond would be restricted for sale to resident Indian entities, with a cap of 500 grams per person per year;
• The government will issue bonds with a rate of interest which will take into account the domestic and international market conditions and may vary from one tranche to another;
• The bonds will be available both in demat and paper form;
• The bonds will be issued in denominations of 5,10,50,100 grams of gold or other denominations;
• The price of gold may be taken from the reference rate, as decided, and the rupee equivalent amount may be converted at the RBI reference rate on issue and redemption. This rate will be used for issuance, redemption and LTV purpose and disbursement of loans;
• Banks / NBFCs / post offices /  National Saving Certificate (NSC) agents and others, as specified, may collect money / redeem bonds on behalf of the government (for a fee, the amount would be as decided);
• 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 gold prices. Since the bond, will be a part of the sovereign borrowing, these would need to be within the fiscal deficit target for 2015-16 and onwards;
• Bonds can be used as collateral for loans. The loan to value ratio is to be set equal to ordinary gold loan mandated by the RBI from time to time;
• Bonds can be easily sold and traded on exchanges to allow early exits for investors who may so desire;
• KYC norms will be the same as that for gold;
• Capital gains tax treatment will be the same as for physical gold for an 'individual' investor. The Department of Revenue has agreed that amendments to the existing provisions of the Income Tax Act, for providing 'indexation benefits to long term capital gains arising on transfer of bond'; and for 'exemption for capital gains arising on redemption of SGB' will be considered in the next budget.This will ensure that an investor is indifferent in terms of investing in these bonds and in physical gold - as far as tax treatment is concerned;
• The amount received from the bonds will be used by the centre in lieu of government borrowing and the notional interest saved on this amount would be credited in an account `old Reserve Fund' which will be created. Savings in the costs of borrowing compared with the existing rate on government borrowings will be deposited in the Gold Reserve Fund to take care of the risk of increase in gold price that will be borne by the government. Further, the Gold Reserve Fund will be continuously monitored for sustainability.
• On maturity, the redemption will be in rupee amount only. The rate of interest on the bonds will be calculated on the value of the gold at the time of investment. The principal amount of investment, which is denominated in grams of gold, will be redeemed at the price of gold at that time. If the price of gold has fallen from the time that the investment was made, or for any other reason, the depositor will be given an option to roll over the bond for three or more years;
• The deposit will not be hedged and all risks associated with gold price and currency will be borne by centre through the Gold Reserve Fund. The position may be reviewed in case 'Gold Reserve Fund' becomes unsustainable;
• Upside gains and downside risks will be with the investor and the investors will need to be aware of the volatility in gold prices;
• The bond will be marketed through post offices / banks / NBFCs and by various brokers / agents (including NSC agents) who will be paid a commission.