Sovereign Gold Bonds Scheme & Gold Monetization Schemes

The union Cabinet gave its approval for the Sovereign Gold Bond Scheme. Bond will be issued on payment of money and would be linked to the price of gold. The sell would be restricted to resident Indian entities and each entry cannot buy more than 500 grams per person per year. The bonds will be issued in denominations of 2.5 and 10 gm of gold or other denominations. The bonds will be issued with a nominal rate of interest as decided by the govt. The rate of interest on the bonds will be payable in terms of gold

 Details

Sovereign Gold Bonds Scheme & Gold Monetization Schemes
Introduction of Sovereign Gold Bonds Scheme
The Union Cabinet chaired by the Prime Minister, Shri Narendra Modi, gave its approval for
introduction of the Sovereign Gold Bonds Scheme, as announced in the Union Budget 2015-
16.

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 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 Ministry of Finance. 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:-
i. Sovereign Gold Bonds will be issued on payment of rupees and denominated in grams of
gold.

ii. Bonds will be issued on behalf of the Government of India by the RBI. Thus, the Bonds will
have a sovereign guarantee.

iii. The issuing agency will need to pay distribution costs and a sales commission to the
intermediate channels, to be reimbursed by Government.

iv. The bond would be restricted for sale to resident Indian entities. The cap on bonds that
may be bought by an entity would be at a suitable level, not more than 500 grams per person
per year.

v. The Government will issue bonds with a rate of interest to be decided by the Government.
The rate of interest will take into account the domestic and international market conditions
and may vary from one tranche to another. This rate of interest will be calculated on the value
of the gold at the time of investment. The rate could be a floating or a fixed rate, as decided.

vi. The bonds will be available both in demat and paper form.

vii. The bonds will be issued in denominations of 5,10,50,100 grams of gold or other
denominations.

viii. 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.

ix. 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).

x. 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.

xi. 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.

xii. Bonds to be easily sold and traded on exchanges to allow early exits for investors who
may so desire.

xiii. KYC norms will be the same as that for gold.

xiv. 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 (Budget 2016-17).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.

xv. The amount received from the bonds will be used by Gol in lieu of government borrowing
and the notional interest saved on this amount would be credited in an account "Gold 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.

xvi. 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.
xvii. The deposit will not be hedged and all risks associated with gold price and currency will
be borne by Gol through the Gold Reserve Fund. The position may be reviewed in case 'Gold
Reserve Fund' becomes unsustainable.

xviii. Upside gains and downside risks will be with the investor and the investors will need to
be aware of the volatility in gold prices.

xix. In order to ensure wide availability, the bond will be marketed through post
offices/banks/NBFCs and by various brokers/agents (including NSC agents) who will be paid
a commission.

Introduction of Gold Monetization Schemes

The Union Cabinet chaired by the Prime Minister, Shri Narendra Modi, gave its approval for
introduction of Gold Monetization Schemes (GMS), as announced in the Union Budget 2015-
16.

The objective of introducing the modifications in the schemes is to make the existing
schemes more effective and to broaden the ambit of the existing schemes from merely
mobilizing gold held by households and institutions in the country to putting this gold into
productive use. The long-term objective which is sought through this arrangement is to reduce
the country's reliance on the import of gold to meet domestic demand.
GMS would benefit the Indian gems and jewellery sector which is a major contributor to
India's exports. In fiscal year 2014-15, gems and jewellery constituted 12 per cent of India's
total exports and the value of gold items alone was more than $13 billion (provisional figures).
The mobilized gold will also supplement RBI’s gold reserves and will help in reducing the
government's borrowing cost.

The revamped Gold Deposit Scheme (GDS) and the Gold Metal Loan (GML) Scheme involves
changes in the scheme guidelines only. 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 scheme will help in mobilizing the large amount of gold lying as an idle asset with
households, trusts and various institutions in India and will provide a fillip to the gems and
jewellery sector. Over the course of time this is also expected to reduce the country's
dependence on the import of gold. The new scheme consists of the revamped GDS and a
revamped GML Scheme.

Revamped Gold Deposit Scheme

Collection, Purity Verification and Deposit of Gold under the revamped GDS:
Out of the 331 Assaying and Hallmarking Centres spread across various parts of the country,
those which will meet criteria as specified by Bureau of Indian Standards (BIS) will be allowed
to act as Collection and Purity Testing 1 Centres for purity of gold for the purpose of this
scheme. The minimum quantity of gold that a customer can bring is proposed to be set at 30
grains. Gold can be in any form (bullion or jewellery). The number of these centres is expected
to increase with time.

Gold Savings Account:
In the revamped scheme, a Gold Savings Account will be opened by customers at any time,
with KYC norms, as applicable. This account would be denominated in grams of gold.

Transfer of Gold to Refiners:
Collection and purity testing centres will send the gold to the refiners. The refiners will keep
the gold in their ware-houses, unless banks prefer to hold it themselves. For the services
provided by the refiners, they will be paid a fee by the banks, as decided by them, mutually.
The customer will not be charged.
The banks will enter into a tripartite Legal Agreement with refiners and Collection and Purity
Testing Centres that are selected by them to be their partners in the scheme.

Tenure:
The deposits under the revamped scheme can be made for a short-term period of 1-3 years
(with a roll out in multiples of one year); a medium-term period of 5-7 years and a long-term
period, of 12-15 years (as decided from time to time). Like a fixed deposit, breaking of lock-in
period will be allowed in either of the options and there would be a penalty on premature
redemption (including part withdrawal).

Interest rate:

The amount of interest rate payable for deposits made for the short-term period would be
decided by banks on basis of prevailing international lease rates, other costs, market
conditions etc. and will be denominated in grams of gold. For the medium and long-term
deposits, the rate of interest (and fees to be paid to the bank for their services) will be decided
by the government, in consultation with the RBI from time to time. The interest rate for the
medium and long-term deposits will be denominated and payable in rupees, based on the
value of gold deposited.

Redemption:

For short-term deposits, the customer will have the option of redemption, for the principal
deposit and interest earned, either in cash (in equivalent rupees of the weight of deposited
gold at the prices prevailing at the time of redemption) or in gold (of the same weight of gold
as deposited), which will have to be exercised at the time of making the deposit. In case the
customer will like to change the option, it will be allowed at the bank's discretion. Redemption
of fractional quantity (for which a standard gold bar/coin is not available) would be paid in
cash. For medium and long-term deposits, redemption will be only in cash, in equivalent
rupees of the weight of the deposited gold at the prices prevailing at the time of redemption.
The interest earned will however be based on the value of gold at the deposit on the interest
rate as decided.

Utilization:

The deposited gold will be utilized in the following ways:
· Under medium and long-term deposit
• Auctioning
• Replenishment of RBIs Gold Reserves
• Coins
• Lending to jewelers
· Under short-term deposit
• Coins
• Lending to jewelers
· Tax Exemption: Tax exemptions, same as those available under GDS would be made
available to customers, in the revamped GDS, as applicable.
· Gold Reserve Fund: The difference between the current borrowing cost for the
Government and the interest rate paid by the Government under the medium/long term
deposit will be credited to the Gold Reserve Fund.
· Revamped Gold Metal Loan Scheme

· Gold Metal Loan Account: A Gold Metal Loan Account, denominated in grams of gold, will
be opened by the bank for jewelers. The gold mobilized through the revamped GDS, under the
short-term option, will be provided to jewelers on loan, on the basis of the terms and
conditions set-out by banks, under the guidance of RBI.

· Delivery of gold to jewelers: When a gold loan is sanctioned, the jewelers will receive
physical delivery of gold from refiners. The banks will, in turn, make the requisite entry in the
jewelers’ Gold Loan Account. Interest received by banks: The interest rate charged on the GML
will be decided by banks, with guidance from the RBI.

 The tenor of the GML at present is 180 days. Given that the minimum lock-in period for
gold deposits will be one year, based on experience gained, this tenor of GML may be reexamined in future and appropriate modifications made, if required.

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