The
government of India has approved the sovereign gold bond scheme. Sovereign Gold Bonds (SGB) are certificates issued by the government saying that investors bought a
certain amount of gold. The value of the bond will be linked to the price of
gold and in other words it provides an alternative to purchasing gold.
The
scheme will help reduce demand for physical gold by shifting a part of the
estimated 300 tone of physical bars and coins purchased every year for
investment into gold bonds. The maximum investment is capped at 500 gm per
person per year. The bonds will be available in both demat and paper forms. The
tenor of the bond will be 5 to 7 years, which will protect investors from
medium-term volatility in gold prices. The bonds can be used as collateral for
loans and the loan-to-value will be set by RBI. The bonds can be traded on the
exchange to allow early exits.
Whether
enough trading will happen in the exchange is something that will have to be
seen, say analysts.
The
redemption will be in cash only and the depositor will have the option to roll
over the bond for three or more years if gold prices are lower. The government
will be exposed to gold price and exchange-rate risk, for which it will create
the Gold Reserve Fund. The deposits under the scheme will not be hedged. The
capital gains tax treatment will be the same as for physical gold. The KYC
norms will also be the same as that for gold. However, investors can avail of
indexation benefit to the long-term capital gains arising on transfer of bonds.
Analysts
say the Sovereign Gold Bond Scheme will not affect gold exchange-traded funds
(ETFs) as the latter have no limits on investments. Moreover, gold ETFs are
highly liquid and investors can redeem their units any time they want.
Financial planners suggest that, ideally, a retail investor should not allocate
more than 10-15% of one’s investment portfolio in gold in which ever form, as
any steep and prolonged downturn in its prices could reduce the returns in the
long run. Chirag Mehta, senior fund manager, Alternative Investments at Quantum
MF, says investment in gold is a good portfolio diversification tool, which
helps the investor reduce the overall portfolio risk.
DRAFT
OUTLINE OF THE SOVEREIGN GOLD BOND SCHEME
I. Introduction
a)
Sovereign Gold Bonds will be issued on payment of money and would be linked to
the price of gold.
II.Objective
a)
Need for a Sovereign Gold Bond
The main idea is to reduce the
demand for physical gold.
Shift part of the estimated 300 tons
of physical bars and coins purchased every year for Investment into ‘demat’
gold bonds.
III.Agency
a)
Bonds will be issued on behalf of the Government of India by RBI.
b)
Issuing agency will need to pay distribution costs and a sales commission to
the intermediate channels, to be reimbursed by Government.
IV. Sale to Indian
entities
a)
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.Features
a)
The Government will issue bonds with a nominal rate of interest (which will be
linked to international rate for gold borrowing). An indicative lower limit of
2% may be given but the actual rate will have to be market determined. On
maturity, the investor receives the equivalent of the face value of gold in
Rupee terms. The rate of interest on the bonds will be payable in terms of
grams of gold. The interest will be calculated on 10,000 at a certain per cent
say 2 or 3%.
b)
The price of gold may be taken from NCDEX/ London Bullion Market
Association/RBI and the Rupee equivalent amount may be converted at the RBI
Reference rate on issue and redemption.
C)
Banks/NBFCs/Post Offices may collect money / redeem bonds on behalf of
government (for a fee, the amount would be as decided).
d)
The bonds will be issued in denominations of 2, 5, 10 grams of gold or other
denominations.
e)
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 the 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.
f)
Bonds to be used as collateral for loans. The Loan To Value ratio be set equal
to ordinary gold loan mandated by RBI from time to time.
g)
Bonds to be easily sold, traded on commodity exchanges. o KYC norms to be the
same as that for gold.
h)
Bonds to have a sovereign guarantee.
i)
Capital gains tax treatment will be the same as for physical gold. This will
ensure that an investor is indifferent in terms of investing in these bonds and
in physical gold- as far as the tax treatment is concerned. This is still under
examination.
VI. Hedging
a)
The agency issuing the Sovereign Gold Bonds will be running a price risk on the
amount of bonds issued. The price risk will comprise the price of gold in USD
and the USD/INR exchange rate risk. Hedging of this risk is expensive and since
the agency is the sovereign, and the amounts expected may not exceed 50 tonnes
in the first year, may not hedge it. However, it should be cognizant of the
existence of this risk.
b)
Upside gains and downside risks will be with the investor and the investors will
need to be aware of the volatility in gold prices.
c)
The government would bear the risk of gold price movement on issuances.
VII. Marketing
a)
In order to ensure wide availability the bond will need to be marketed through
post offices and by various brokers/agents who may need to be paid a commission
(like for Kisan Vikas Patra).
VIII. Operational
Issues
a)
Based on the current market price, issuance of gold bonds equivalent of 50
tonnes would be around Rs. 13,500 crore. Since the amount is not very high, it
can be accommodated within the market borrowing programme for 2015-16.
This seems nice. Even I am a newbie and would be making some investments soon for a financially secured future. I have an inherent property too and someone just suggested buying Capital gain Bonds that will help me later on. Can you explain what benefits these capital gain bonds can offer?
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