DRAFT OUTLINE OF THE SOVEREIGN GOLD BOND
SCHEME
(For discussion purposes
only)
I. Introduction
Sovereign Gold Bonds will be issued on payment of
money and would be linked to the price of gold.
II. Objective
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
Bonds will
be issued on behalf of the Government of India by RBI.
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
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
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%.
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.
Banks/NBFCs/Post Offices may
collect money / redeem bonds on behalf of government (for a fee, the amount
would be as decided).
The bonds
will be issued in denominations of 2, 5, 10 grams of gold or other
denominations.
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.
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.
Bonds to be
easily sold, traded on commodity exchanges.
KYC norms to
be the same as that for gold.
Bonds to
have a sovereign guarantee.
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
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.
Upside gains
and downside risks will be with the investor and the investors will need to be
aware of the volatility in gold prices.
The government would bear the risk of gold price
movement on issuances.
VII. Marketing
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..!
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.
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