NEW DELHI: In order to reduce the demand for physical gold, the government on Friday proposed to come out with a sovereign gold bond scheme. The discussion paper on the scheme aims to shift part of the estimated 300 tonnes of physical gold bar purchased every year to demat gold bonds and invites comments till July 2.
The draft says that the bonds will be issued by the Reserve Bank of India (RBI) and the issuing agency will need to pay distribution costs and a sales commission to the intermediate channels like post offices and brokers, to be reimbursed by the government.
The bond would be issued only to resident Indians, subject to a cap of 500 grams per person per year. The bonds will be issued in 2, 5, 10 grams of gold or other denominations, it said, adding that the tenor of the bond could be for a minimum of 5-7 years so that it would protect investors from medium-term volatility in gold prices, the draft said.
According to the World Gold Council, investment demand for gold in India was 180.6 tonnes and formed 21.3 per cent of total gold demand in 2014.
Reacting to the scheme, WGC India Managing Director Somasundaram PR said, “Any step that increases consumer choices and makes gold a fungible asset class is good. ...gold investment products which integrate gold further into the regulated financial sector are a positive development.”
When compared with the rest of the world, investment demand in the country for gold stands at 58.5 per cent of the total gold demand.
The proposed gold bonds will be issued with a nominal rate of interest, which will be linked to international rate for gold borrowing. An indicative lower limit of 2 per cent may be given but the actual rate will have to be market determined.
These bonds will be fully liquid as it will be traded on commodity exchanges. “Since the amount is not very high, it can be accommodated within the market borrowing programme for 2015-16,” the draft said.
Since it will be listed on the bourses, the upside 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, the draft said.
As regards to taxation, the draft said, capital gains tax treatment will be the same as for physical gold. “This will ensure an investor is indifferent in terms of investing in these bonds and physical gold — as far as the tax treatment is concerned. This is still under examination.”
The bonds will be used as collateral for loans and the loan to value ratio will be set equal to ordinary gold loan mandated by RBI from time to time.
Based on the current market price, issuance of gold bonds equivalent of 50 tonnes would fetch government around Rs 13,500 crore.