Thursday 3 December 2015

Government’s Gold Bond Scheme may not attain target

The government is hoping to make the scheme more attractive to customers and reduce large scale import of gold.

The government says its Sovereign Gold Bond Scheme got off to a ‘successful” start. However, industry officials say more needs to be done to ensure its success.

Economic Affairs Secretary Shaktikanta Das recently said the scheme received 63,000 applications for 917 kg of gold amounting to Rs.246 crore in first tranche.

“Sovereign Gold Bond Scheme will be successful if it is marketed like the Kisan Vikas Patra... allowing banks, post offices, NBFCs and jewellers to market it as well. Distribution is the key to its success,” said Keyur Shah, Chief Executive Officer, Precious Metals Business, Muthoot Pappachan Group. Presently, only banks and post offices are allowed to distribute the scheme. The issue is that the banks (distributers) need to be commercially incentivised to run the scheme, officials said. The commercial details are left to the banks, which were not yet been announced. “It can become more popular if more touch points or agents are allowed to market it, where consumers find it comfortable to go,” Shah said. The government is hoping to make the scheme more attractive to customers and reduce large scale import of gold.

“Increased accessibility to the product is an indeed requirement to draw more retail participation,” said Hareesh.V, Research Head, Geofin Comtrade Ltd. “Since the product is largely focused on retail investors, permission given to NBFC’s and retail broking companies to sell the product along with banks and selected post offices would attract more investor attention into the platform.”

However, according to him, applications worth Rs.246 crore in the initial attempt is a relative good number to begin with, but with more ideal selling strategies it would have a greater impact in the overall success of the scheme.

‘Ï will not say it is a success,’ Muthoot’s Shah said.

The government plans to distribute bonds worth 50 tonnes of gold in this financial year 2015-16, which is worth around Rs.13,500 crore. This amount was calculated on the basis of the draft document prepared by the Government in July 2015. In the current market price, it would be at around Rs.12,735 crore.

When contacted by The Hindu, government official, Mr. Das said: “I feel it (first tranche) is a success……our effort is to maximise the collection…we learn from every tranche and this is a continuous process.”

India imported Rs.2.10 lakh crore worth of gold (other than jewellery) in financial year 2014-15. Between April-September 2016, Rs.1.12 lakh crore worth of gold has been imported. As the price of gold is slowing down in the international market, according to sources, imports of gold in the current fiscal likely to escalate compared to previous year’s gold import.

The extension of the issue date of Sovereign Gold Bond indicated that the new scheme had a positive response. Applications for the scheme were accepted from November 5 to 20, and the earlier proposed date of the issue was November 26, 2015. Because of the large number of applications from banks and post offices, RBI has rescheduled the issue date to November 30, 2015.

Issue price
“Even though the issue prices was quoted higher against the ruling market prices, facilities like option to invest in paper form, no dilemma for keeping gold in safe custody and use as collateral for loans attracted the investor interest,” said Mr. Hareesh.

The bond prices were fixed at Indian rupee on the basis of the previous week’s (Monday-Friday) simple average of the closing price of gold of 999 purity published by India Bullion and Jewellers Association (IBJA). The quoted price for the first tranche was set at Rs.2,684 per gram. “The price pegged by the government was high against the then ruling market price during the application period,” said Mr. Hareesh. IBJA prices hit a low of Rs.25,355 per ten gram during that period and investors were pessimistic. Also he said that the conservative rate of interest, longer duration, exclusion of NRIs and tradability in exchanges were the other mind blocks among the investor group. “The price should be more dynamic to reflect the actual market prices. The current scheme price was fixed for a long period which was turned out to be higher than the prevailing market prices,” Mr. Shah added. The recently launched schemes on gold are primarily intended to reduce the country’s reliance on import and to manage the widening current account deficit. Gold Monetisation Scheme, Sovereign Gold Bond and India Gold Coin are the new investment arenas in gold initiated by the Government.

Sovereign gold bond scheme is intended to reduce investment in physical gold and promote investing in gold in demat/paper format. The key intention of the plan is to curtail gold import to the country which account around 800-1000 tonnes per year. The Sovereign Gold Bonds are issued by RBI on behalf of the Government of India. The sovereign bonds are restricted to Indian citizens, including individuals, HUFs, trusts, universities and charitable institutions. The minimum investment limit is 2 units (2 grams) and a maximum is 500 grams. Investors can apply for 2 grams and in multiples of one gram.

The bonds can be used as collateral for the loans. Loan-to-value ratio will be set equal as a loan against ordinary gold mandated by RBI.

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