The Indian government has come out with three gold schemes, the combined purposes of which are to reduce India’s gold imports and bring all the gold lying idle with individuals and households in India into the economy.
The schemes are as follows:
1. Gold Monetization Scheme (GMS)
• The proposed GMS is a revamped version of the erstwhile Gold Deposit Scheme (GDS) and Gold Metal Loan (GML) which were launched in 1999 and 1998 respectively.
• As per the current scheme, the depositor of gold would be given a certificate specifying the amount and purity of the deposited gold, once the investor agrees to do so after fire-assay test done by Collection and Purity Test Centres (CPTCs, certified by Bureau of Indian Standards).
• Subsequently, the customer could submit this certificate to any designated branch of a bank to open a gold savings account in his/her name. Accordingly, the customer’s account would be credited by the bank by “an amount equivalent to the quantity of standard gold of 995 fineness”, based on the prevailing market prices.
• Government will pay banks a total commission for the 1st year to incentivize their participation in popularizing the scheme. This commission includes 1.5% for handling charges and is expected to encourage crucial support as similar programs failed in the past as a result of negligible returns for banks.
• Premature redemption under Medium and Long Term Government Deposits (MLTGD), Any Medium Term (5-7 Years) Deposit will be allowed to be withdrawn after 3 years and any Long Term (12-15 Years) Deposit after 5 years, however this may reduce interest rates. Early withdrawal will provide flexibility to peoples.
• Gold depositors can also give their gold directly to the refiner rather than only through the Collection and Purity Testing Centers (CPTCs). This will encourage the bulk depositors including Institutions to participate in the scheme
• Bureau of Indian Standards (BIS) has modified the licensing condition for refiners already having National Accreditation Board for Testing and Calibration Laboratories (NABL) accreditation from the existing 3 years refining experience to 1 year refining experience. This is likely to increase the number of licensed refiners.
• The quantity of gold collected under the scheme will be expressed up to three decimals of a gram. This will give the consumer better value for the gold deposited.
• Gold to be deposited with the CPTCs/Refineries can be of any purity. The CPTC/Refiner will test the gold and determine its purity which will be basis on which the deposit certificate will be issued.
2. Sovereign Gold Bond Scheme
• Due to various global disturbances like 9/11 attack, followed by Iraq war, and financial crisis, Gold prices appreciated, as it is considered to be the best investment in times of volatility. Thus, a lot of people in India started to store their money in form of Gold to get better returns.
• This, however, removed vital financial assets from the financial markets and shifted that into bank lockers, which doesn’t pay any real dividends to economy.
• The scheme will help in reducing the demand for physical Gold by shifting a part of the estimated 300 tons 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.
• The salient features of the Scheme are:-
a) Sovereign Gold Bonds will be issued on payment of rupees and denominated in grams of Gold.
b) Bonds will be issued on behalf of the Government of India by the RBI. Thus, the Bonds will have a sovereign guarantee.
c) Eligibility: Resident Indian entities including individuals, HUFs, Trusts, Universities and charitable institutions
d) Denomination: Multiples of gram(S) of gold with a basic unit of 1 gm
e) Tenure: 8 years with an exit option from the 5th year to be exercised on the interest payment dates
f) Minimum size: 2 units (i.e. 2 grams of gold)
g) Maximum limit: 500 grams per person per fiscal year (April-March). The Compliance will be on self-declaration basis
h) Frequency: The Bonds will be issued in tranches; each tranche will be kept open for a period to be notified. The issuance date will also be specified in the notification. For example, currently it is the 2nd trance which is up for sale, 1st trance sold out by January 22, 2016.
i) Interest rate: Fixed rate of 2.75% per annum payable semi-annually on the initial value of investment
j) Collateral: Bonds can be used as collateral for loans. The Loan-To-Value (LTV) ratio is to be set equal to ordinary Gold loan mandated by the Reserve Bank from time to time
k) Tax treatment: Capital gains tax treatment will be same as for physical gold for an ‘individual’ investor
l) Tradability: Bonds will be tradable on exchanges
m) SLR eligibility: The Bonds will be eligible for Statutory Liquidity Ratio (SLR) as they form part of market borrowing program of the Government of India (GOI). This, means banks can also opt for high yielding asset for SLR funds.
• Thus, it is evident Government want to provide incentives to people to for go investment in physical Gold and instead it wants to bring that investment to the industry and infrastructure.
• Similarly it is important that government must use this money in projects with very high returns.
3. Indian Gold Coins/Gold Bullion Scheme
• The coin will be the 1st ever National gold coin minted in India and will have the National Emblem of Ashok Chakra engraved on one side and Mahatma Gandhi on the other side .
• Initially the coins will be available in denominations of 5 and 10 grams; later a 20 gram bullion will also be available through MMTC outlets.
• It would provide gold coins of maximum possible purity and check the supply of counterfeit or adulterated gold sold by jewelers.
• While it may not address people looking forward to buy jewellery, but people who buy gold coins for investment purposes can buy these, if they are still reluctant about the Gold bond scheme.
• Physical gold coins are more liquid resource compared to gold bonds, as perceived by many people in India.