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Sovereign Gold Bond Scheme
Aug 02, 2017

[GS Paper III: (Indian economy and issues relating to planning, mobilization of resources, growth, development and employment)]

Why in news?

The Central government has recently introduced a few changes in the Sovereign Gold Bond (SGB) Scheme. The primary change was the increase in the limit to 4 kg (from 0.5kg) for individuals, HUFs (Hindu Undivided Family) and 20 kg for a trust.

Why this change?

This was probably done to encourage high net-worth individuals, rich farmers as well as trusts to invest in these bonds. 

  • Unrealistic pricing pattern vis-a-vis the international price of Gold: Gold prices are highly sensitive to international geopolitical tensions, U.S. Federal rates and dollar upswings. They move in a price band of 5-10% year on year. Past SGB prices ranging from Indian_Rupee_symbol.png (10×12)3,150 per gm to Indian_Rupee_symbol.png (10×12)2,750 per gm was often not in parity with the market rate realities and this often led to the SGB consumers losing money, despite earning a 2.5% return on investments. 
  • Another factor diminishing the attractiveness of the SGB is its price being pegged to a 10% import duty, and any reduction in the import duty by the Government in the subsequent period would likely inflict severe loss of value to those who have already invested.

What is SGB?

Sovereign Gold Bonds are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds can be redeemed in cash on maturity. The Bonds are issued by Reserve Bank of India on behalf of government. 

  • These bonds can be used as collateral for loans. 
  • They can be sold or traded on stock exchanges. 
  • Eligible investors include individuals, HUFs, trusts, universities, charitable institutions etc residing in India.
  • There was a quantitative restriction of 500 grams per person per year which has now been revised to 4 kg.
  • Collection and redemption of the bonds can be done through Banks/NBFCs/Post Offices.
  •  Initially, the interest rate was fixed at 2.75% per annum (over and above the increase in price of gold). This has been reduced to 2.5% per annum.
  • The bonds will be issued in denominations of 5, 10, 50 and 100 grams of gold or other denominations.
  • The tenor of the bond could be for a minimum of 5 to 7 years, which would protect investors from medium term volatility in gold prices.
  • For an 'individual' investor, capital gains tax treatment for SGBs will be the same as for physical gold.
  • Gold Reserve Fund has been created by the government, to take care of the risk associated with the due to an increase in gold price. 

Need for SGBs

  • The basic premise was that most Indians believe in gold as a time-tested and safe asset class and prefer it over other forms of investment.
  • The SGB scheme was launched by the government in November 2015 with a target  to shift part of the estimated 300 tonnes of physical bars and coins purchased every year for investment into demat gold bonds.
  • It was aimed at curbing the demand of physical gold for investment purpose and replace it with alternate paper or electronic investments.
  • Since most of the demand for gold in India is met through imports, this scheme would help in maintaining the country's Current Account Deficit within sustainable limits. 

Way forward

  • Government should allow mass channels such as gold loan Non-Banking Finance Companies (NBFCs) to market these bonds.
  • Offering gold loan against Sovereign Gold Bonds would help popularize the product from a consumer angle.
  • In case of physical delivery of bullion against SGB at a later date, import duty and IGST should be levied at the point of delivery. This will make the scheme much more attractive to the public, thereby enabling substitution of expensive imports that impact the Current Account Deficit.


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