July 27, 2017

The cabinet committee on economic affairs (CCEA) on Wednesday decided to raise the cap on individual subscription of sovereign gold bonds to 4 kg a year for Hindu undivided family from 500 grams and gave the finance ministry the flexibility to change the design of the scheme whenever it deems fit to make it more attractive.

The ceiling for annual subscription has been raised to as much as 20 kg for trusts and similar entities that were also eligible for subscribing the gold bonds up to 500 grams. The cap will be counted on a financial year basis and include the bonds purchased during the trading in the secondary market. However, the ceiling on investment will not include the holdings as collateral by banks and financial institutions.

“The bonds will be available ‘on tap’. Based on the consultation with NSE, BSE, banks and Department of Post, features of product to emulate ‘On Tap’ sale would be finalised by the ministry of finance,” said an official statement. To improve liquidity and tradability of the gold bonds, appropriate market making initiatives will be devised. Market makers could be commercial banks or any other public sector entity, such as MMTC or any other entity as decided by the government, according to the statement. The government may, if so felt necessary, allow higher commission to agents.
The minimum individual subscription can be as low as one gram a year. The gold bond scheme offers a 2.5% interest to investors, which is payable semi-annually on the nominal value of investment. While the interest is taxable, investors have been exempted from any tax on capital gains from the redemption of such gold bonds.

The latest CCEA move is part of the government’s efforts to garner as much as Rs 5,000 crore from all the three gold schemes this fiscal. The sovereign gold bond, gold monetisation scheme and Indian gold coin were launched by Prime Minister Narendra Modi in late 2015, as the government wanted to discourage imports of the precious metal and curb their debilitating impact on trade balance.

The gold schemes are still far from a roaring success though. The government had budgeted to mop up Rs 10,000 crore from the three schemes in 2016-17 but it had to settle for Rs 3,809 crore in the revised estimate that is equivalent of just around 2% of the country’s annual consumption.
In 2015-16, the schemes garnered Rs 1,318 crore. Of the two big schemes, gold bond has been more popular than the monetisation scheme (the government mopped up just around 7-8 tonne worth over Rs 2,000 crore under the monetisation scheme since its launch in November 2015). So, the government seems to be focussing more on the bond scheme to make it even more attractive.

Earlier this month, the government invited applications for another tranche of sovereign gold bonds — the second time in this fiscal. The bonds will be issued to eligible applicants on July 28. The bonds will be sold through banks, Stock Holding Corporation of India, designated post offices, the National Stock Exchange and the Bombay Stock Exchange. The tenor of the bonds is for a period of eight years, with exit option from 5th year to be exercised on the interest payment dates. Payment for the bonds will be through cash (but only up to a maximum of Rs 20,000) or demand draft or cheque or electronic banking. The issue price of the gold bonds is usually Rs 50 per gram less than the nominal value.

The price of the bonds is fixed in rupees on the basis of simple average of closing price of gold of 999 purity published by the India Bullion and Jewellers Association for the week (Monday to Friday) preceding the subscription period.

[The Financial Express]