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Gold Monetisation Schemes: Civil Services Mentor Magazine - January - 2016

Gold Monetisation Schemes

Due to various traditions and habbits gold use in India is at a very high level. Gold has been used in various forms, it has been used in marriages by bride, big amount of gold is present in temples across India. Apart from this gold has been used by traders as a commodity for the purpose of making profit. Gold is also kept in households as a reserve currency. Sociological aspect also makes women in India keep more of gold. Gold historically has been the property which women could hold. In the year 2011 India imported more gold than any other country, total import was close to 1,000 tonnes, which is also a fifth of global annual supply. There has been a surge in gold consumption in India in last few decades. Until 1990 imports were all but banned so total consumption of Gold per year was below 75 tonnes till 1990. That time smuggling of bullion was at its peak and price of gold in India were much more than international market. But deregulation has seen an explosion in gold purchases. Now most gold coming into India enters legally through banks. Many loans made against gold collateral are not from shifty money lenders but registered financial firms.

This high quantity of Gold import has various negative effects on the economic health of the country. High quantity of import increases the current account deficit, which effects the monetary and fiscal policy. It puts a pressure on external account, which drives the exchange rate. If all the gold available and lying idle inside the country can be monetised, it will make good impact on the health of countries economy. In order to monetise the gold inside the country the government has come up with three new shemes.

The salient features of each of the aforesaid scheme are as follows:

Gold Monetisation Scheme (GMS), 2015

The GMS will replace the existing Gold Deposit Scheme, 1999. However, the deposits outstanding under the Gold Deposit Scheme will be allowed to run till maturity unless the depositors prematurely withdraw them. Resident Indians (Individuals, HUF, Trusts including Mutual Funds/Exchange Traded Funds registered under SEBI (Mutual Fund) Regulations and Companies) can make deposits under the scheme. The minimum deposit at any one time shall be raw gold (bars, coins, jewellery excluding stones and other metals) equivalent to 30 grams of gold. There is no maximum limit for deposit under the scheme. The gold will be accepted at the Collection and Purity Testing Centres (CPTC) certified by Bureau of Indian Standards (BIS). The designated banks will accept gold deposits under the Short Term (1-3 years) Bank Deposit (STBD) as well as Medium (5-7 years) and Long (12-15 years) Term Government Deposit Schemes (MLTGD). There will be provision for premature withdrawal subject to a minimum lock-in period. The interest rate in the STBD will be determined by the banks. The interest rate in the medium term bonds has been fixed at 2.25% and for the long term bonds is 2.5% for the bonds issued in 2015-16. The Short Term Bank Deposits will attract applicable Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). However, the stock of gold held by the banks will count towards the general SLR requirement. The opening of Gold Deposit Accounts will be subject to the same rules with regard to customer identification (KYC) as are applicable to any other deposit account.

Sovereign Gold Bond Scheme

The Government of India has decided to issue Sovereign Gold Bonds. The Bonds will be issued in multiple tranches subject to the overall borrowing limits of GOI. The Bonds will be sold through banks and designated post offices as notified. It may be recalled that the Union Finance Minister had announced in Union Budget 2015-16 about developing a financial asset, Sovereign Gold Bond, as an alternative to purchasing metal gold. Sovereign Gold Bond will be issued by Reserve Bank India on behalf of the Government of India. The Bonds will be restricted for sale to resident Indian entities including individuals, HUFs, trusts, Universities, charitable institutions. The Bonds will be denominated in multiples of gram(s) of gold with a basic unit of 1 gram. The tenor of the Bond will be for a period of 8 years with exit option from 5th year to be exercised on the interest payment dates. Minimum permissible investment will be 2 units (i.e. 2 grams of gold).The maximum amount subscribed by an entity will not be more than 500 grams per person per fiscal year (April-March). A self-declaration to this effect will be obtained. A mechanism will be put in place for internal verification of the self declarations.

In case of joint holding, the investment limit of 500 grams will be applied to the first applicant only. Each tranche will be kept open for a period to be notified. The issuance date will also be specified in the notification. Price of Bond will be fixed in Indian Rupees on the basis of the previous week’s (Monday–Friday) simple average of closing price of gold of 999 purity published by the India Bullion and Jewellers Association Ltd. (IBJA).Payment for the Bonds will be through electronic funds transfer/cash payment/ cheque/ demand draft. The investors will be issued a Stock/Holding Certificate. The Bonds are eligible for conversion into demat form. The investors will get interest at a fixed rate of 2.75 per cent per annum payable semi-annually on the initial value of investment for the bonds issued in 2015-16. 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. Know-your-customer (KYC) norms will be the same as that for purchase of physical gold. Department of Revenue has agreed to ensure tax neutrality between the purchase of physical gold and investment in the gold bonds. The Bonds will be eligible for Statutory Liquidity Ratio (SLR). Commission for distribution shall be paid at the rate of 1% of the subscription amount.