Prime Minister Narendra Modi on 5 November 2015 launched three gold related schemes. The schemes are – Gold Monetization Scheme, Sovereign Gold Bond Scheme and Indian Gold Coins.
The three schemes were announced by the Union Finance Minister Arun Jaitley in his 2015-16 budget speech in February 2015.
Prime Minister Narendra Modi launched three ambitious schemes to reduce the physical demand for gold and fish out 20,000 tonnes of the precious metal worth $800 billion lying idle with households.
The Gold Monetisation Scheme (GMS), 2015, will offer resident Indians option to deposit their precious metal and earn an interest of up to 2.5 per cent, while under the Sovereign Gold Bonds Scheme, investors can earn an interest rate of 2.75 per cent per annum by buying paper bonds.
Modi also unveiled the first ever Indian gold coin and bullion, bearing the national emblem, Ashok Chakra on one side, and Mahatma Gandhi’s image engraved on the other side.
Initially the coins will be available in denominations of 5 and 10 gm. A 20 gm bullion will also be available through 125 MMTC outlets.
The primary purpose of the schemes is to reduce dependence on imported gold, recycle the unutilized gold in the country and most importantly, streamline the gold business in the country. At present, India is the largest consumer of gold in the world.
1. Gold Monetization Scheme (GMS)
Its objective is to mobilize unutilized gold from individuals, households and institutions and make them available to gold-base industries including jewellers.
Directions on implementation of GMS 2015
• 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 of 995 fineness.
• 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) and notified by the Central Government under the Scheme.
• The deposit certificates will be issued by banks in equivalence of 995 fineness of gold.
• The principal and interest of the deposit under the scheme will be denominated in gold.
• 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. While, STBD will be accepted by banks on their own account, but the latter will be on behalf of Union Government.
• There will be provision for premature withdrawal subject to a minimum lock-in period and penalty to be determined by individual banks.
• Interest on deposits will start accruing from the date of conversion of gold deposited into tradable gold bars after refinement or 30 days after the receipt of gold at the CPTC or the bank’s designated branch.
• During the period from the date of receipt of gold by the CPTC or the designated branch to the date on which interest starts accruing, the gold accepted shall be treated as an item in safe custody held by the designated bank.
• 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 as are applicable to any other deposit account.
Utilisation of Gold mobilised under GMS
The designated banks may sell or lend the gold accepted under STBD to MMTC for minting India Gold Coins (IGC) and to jewellers, or sell it to other designated banks participating in GMS. The gold deposited will be auctioned by MMTC or any other agency authorised by the Central Government and the sale proceeds will be credited to the Union Government’s account with the Reserve Bank.
The entities participating in the auction may include the Reserve Bank, MMTC, banks and any other entities notified by the Union Government. Banks may utilise the gold purchased in the auction for purposes indicated above.
Risk Management under GMS
Designated banks should put in place a suitable risk management mechanism, including appropriate limits, to manage the risk arising from gold price movements in respect of their net exposure to gold.
For this purpose, banks have been allowed to access the international exchanges, London Bullion Market Association or make use of over-the-counter contracts to hedge exposures to bullion prices subject to the guidelines issued by the Reserve Bank.
Grievance Redress Process under GMS
Complaints against designated banks regarding any discrepancy in issuance of receipts and deposit certificates, redemption of deposits, payment of interest will be handled first by the bank’s grievance redress process and then by the Reserve Bank’s Banking Ombudsman.
2. Sovereign Gold Bond Scheme
The purpose of the scheme is to reduce the demand for physical gold and to shift part of the estimated 300 tons of physical bars and coins purchased every year for investment into Demat (Dematerialised) gold bonds.
Features of Sovereign Gold Bonds Scheme
• Bonds 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 entity cannot buy more than 500 grams per person per year.
• The bonds will be issued in denominations of 2, 5 and 10 grams of gold or other denominations.
• 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.
• The bonds will be issued with a nominal rate of interest (which will be linked to international rate for gold borrowing) as decided by the government.
• The rate of interest on the bonds will be payable in terms of grams of gold. The interest will be calculated on 10000 at a certain per cent say 2 or 3 percent.
• On maturity, the investor receives the equivalent of the face value of gold in rupee terms.
• Bonds will be issued on behalf of the Government of India by the Reserve Bank of India (RBI).
• The bond will be marketed through post offices and by various brokers/agents who may need to be paid a commission (like for Kisan Vikas Patra).
• The price of gold may be taken from National Commodity and Derivatives Exchange (NCDEX) / London Bullion Market Association/RBI and the rupee equivalent amount may be converted at the RBI reference rate on issue and redemption.
• Banks/ Non-bank financial companies (NBFCs)/Post Offices may collect money / redeem bonds on behalf of government (for a fee, the amount would be as decided).
• 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.
• 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.
• These Bonds will be easily sold and traded on commodity exchanges
• Bonds can be used as collateral for loans. The Loan to Value ratio can be set equal to ordinary gold loan mandated by RBI from time to time.
• During 2015-16 financial year gold bonds equivalent of 50 tonnes of gold would be issued. Since the amount, around 13500 crore rupees, is not very high, it can be accommodated within the market borrowing programme for 2015-16.
• Since these bonds are part of the sovereign borrowing, they will be within the fiscal deficit target for 2015-16 and onwards.
• The amount received from the bonds will be used in lieu of government borrowing and the notional interest saved on this amount would be credited in an account Gold Reserve Fund.
• Gold Reserve Fund will be utilised to take care of the risk of increase in gold price that will be borne by the government.
3. Indian Gold Coins
• Its purpose is to revive investment and reduce dependence on imports of gold coins. At present, India has been importing about 60 tonnes of gold coins annually that are sold at a premium of 8-10 per cent.
• Under the scheme, gold coins bearing the Ashok Chakra will be minted by the Security Printing and Minting Corporation of India.
• Initially, the coins will be available in denominations of 5 gm and 10 gm.
• They will be sold through banks, post offices and state-run MMTC Ltd. (Metals and Minerals Trading Corporation of India) which will sell them through the World Gold Council (WGC).