GOLD BOND SCHEME

Submitted By Adarsh Chaudhary

SOVERIGN GOLD BOND
INTRODUCTION

 The Government of India has launched the Sovereign Gold Bonds Scheme.
 In this scheme investors will get returns that are linked to gold price, the
scheme is expected to offer the same benefits as physical gold.
 They can be used as collateral for loans and can be sold or traded on
stock exchanges.
Features

 It is an alternative to buying physical gold.

 Sovereign gold bonds(SGBs) 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 will be redeemed in cash on maturity.
 This scheme is expected to offer the same benefit as the physical gold.
 The Bond is issued by Reserve Bank on behalf of Government of India.
How Sovereign Bond works?

 You invest rupees today at the international price of gold, get an additional
two percent (or a bit more) interest annually, and when you exit after five
or seven years, you get the latest price of gold plus interest - and the same
capital gains treatment as physical gold assets.
Why this Bond?

 India imports more than 800 tones of gold every year(world gold council
report).
 More than 90% of our gold demand is fulfilled by import, so it forms the
major expenditure towards import bill.
 Importing more and more gold adds to trade deficit (total value of import-
total value of export), ie more revenue going out of India which ultimately
leads to rise in Current Account Deficit(CAD). Higher the CAD hampers the
economic growth.
Eligibility

 Persons resident in India as defined under Foreign Exchange Management

Act, 1999 are eligible to invest in SGBs.
 Eligible investors include individuals, trusts, universities, charitable institutions,
etc.
 Minors can also invest but the application on behalf of the minor has to be
made by his / her guardian.
Benefits of Sovereign Gold Bond

 The tenor of the bond is for a minimum of 8 years with option to exit in 5th,
6th and 7th years.
 They will carry sovereign guarantee both on the capital invested and the
interest.
 Bonds can be used as collateral for loans.
 The Sovereign Gold Bonds will be available both in demat and paper form.
 Bonds would be allowed to be traded on exchanges to allow early exits for
investors who may so desire.
Benefits continued..

 In Sovereign Gold Bonds, capital gains tax treatment will be the same as for
physical gold for an 'individual' investor. The department of revenue has
said that they will consider indexation benefit if bond is transferred before
maturity and complete capital gains tax exemption at the time of
redemption.
AIMS OF SGB

 In the first instalment the government has proposed that it would issue
bonds to the tune of around 13,500 crore.
 This is almost equal to 50 tonnes of gold.
 The scheme aims at reducing the import of gold. Out of the 1,000 tonnes of
gold consumed every year, most of it is imported. Gold is the second
highest expense on the import bill after oil.
 It will be issued in denomination of 5,10,50,100 grams of gold or other
denomination.
Limits for Investment

 Minimum investment in the Bond shall be two grams with a maximum

buying limit of 500 grams per person per fiscal year (April – March).
 In case of Joint holding, the limit applies to the first applicant.
 The Bonds are issued in denominations of one gram of gold and in multiples
thereof.
Implications

 One, the market risk is yours.

 Two, the scheme will not appeal to those who want physical gold for
jewelry or for future use.
 Three, the two percent interest payable annually means holding sovereign
gold bonds will be more rewarding than gold ETFs (exchange traded
funds).
 Four, the scheme could appeal to savers who want physical gold sometime
in the future.
 Five, the government will have to bear the currency and market risks -
which means it can both borrow cheap (if gold prices fall) or expensively.
Authorized Agencies Selling SGB

 Bonds are sold through scheduled commercial banks Like SBI,PNB etc
 The bonds can also be issued by non-banking finance companies, National
Saving Certificate (NSC) agents for a fee.
 The application form will also be provided by the designated Post Offices.
 It can also be downloaded from the RBI’s website. Banks may also provide
online application facility.
Challenges

 Most of us prefer buying physical gold to paper gold. It would be very

challenging to make individuals switch from buying physical gold to paper
which promises gold like returns.
 The duration of bond can be a very important factor.
 How capital gains on these bonds are treated , is also a very important
factor. ( from taxation point of view)
Challenges continued…

 If gold prices rises steeply, banks may get affected, the repayment burden
increases. So, they may have to cover this risk either by hedging or by
taking insurance cover.
 The minimum tenure of the deposit can be 1 year.
 Banks may have to provide ‘pre-mature’ redemption facility.
Benefits for Investors in SGB

 Investors will get capital gain if price of gold appreciates while holding the
bonds.
 Investors will get an annual fixed rate of 2.75 per cent payable semi-
annually on initial value of the investment.
 Capital gains will be taxed as in case of physical gold holdings. A short-term
capital gain tax will apply if you sell within three years.
Benefits for Investors continued…

 Since there is no regular income from investment in gold, the income will
not be subjected to tax.
 It will be possible to sell and trade the bonds on exchange, in case the
investor want to redeem them before maturity.
Benefits for Banks

 Banks have the freedom to set their own interest rates on the gold deposit.
 Banks can also use the deposited gold to make coins and sell them to the
public.
 Bank can have another stream of income through gold monetization
deposit scheme.
 There is also a proposal to allow the banks to use the deposited to meet
statutory requirements like CRR and SLR.
Conclusion

 The main idea is to reduce the demand for physical gold.

 Sovereign gold bonds are papers or certificates issued by the government saying that
investors bought a certain amount of gold. The value of the bond will be linked to the
price of gold. The bonds would provide an alternative to purchasing physical gold.
 Banks/NBFCs/Post Offices may redeem bonds on behalf of government (for a fee, the
amount would be as decided)
 Bonds will be issued on behalf of the Government of India by RBI
 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.
 The bonds will be issued in denominations of 2, 5, 10 grams of gold or other
denominations
 Capital gains tax treatment will be the same as for physical gold.
 Bonds to be easily sold, traded on commodity exchanges. Bonds to have a sovereign
guarantee.
Continued…
 Bonds to be easily sold, traded on commodity exchanges. Bonds to have a
sovereign guarantee.
 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
 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.
 THANK YOU
Submitted By: Adarsh Chaudhary (1871401137)
Submitted To: Mr Amar Rao