The best way to handle this bond scheme is to ask authorised banks to open a Sovereign Gold account and issue a simple pass book to the investor showing the quantum of gold to his or her credit on the lines of an ordinary savings bank account
The Sovereign Gold Bond (SGB) scheme was launched by the Central Government with great fanfare with the expectation that people will rush to buy them because of the additional benefit of interest @2.75 pa paid on the invested amount. The first tranche of the SGB scheme was open for subscription between 5 November 2015 and 20 November 2015. During these 15 days, the scheme could get a total of 63,000 applications for 917 kgs of gold amounting to Rs246 crore and the government hailed it as an excellent response for an innovative product.
If you analyse the scheme in its entirety, it is nothing but a speculative investment in the name of gold with a small interest benefit thrown in. You were required to invest a minimum of Rs5,368 towards two grams of gold at a pre-determined gold rate (at Rs2,684 per gram) and get back the amount anytime between five and eight years at the rate of gold prevailing on the date of redemption. The scheme did not provide for getting physical gold on maturity, and you can get the equivalent amount only in rupees.
SGB was touted as the best option to take exposure to gold, but in reality there is no option at all to get gold and at the end of the period the buyer of the bond may gain if the price of gold is higher or may lose if the gold price is lower than the price paid by the investor. And nobody can predict with any certainty what will be the price of gold at the end of five or eight years from now. Therefore, in short it was pure and simple speculation, which, unfortunately did not go well with investors.
Why the Scheme did not get the response it deserved?
People invest in physical gold not out of love for hoarding gold, not for earning income out of gold investment, not for earning capital gains by selling it when the price of gold rises and certainly not for speculation, but only for two specific reasons., which are peculiar to Indian psyche.
The first reason is to serve as a protection against life’s uncertainties, because, during emergencies, gold is the only commodity that gets you instant cash without question and without any degree of fear or favour.
The second reason is the social obsession of having to grace your children with gold ornaments during their marriage and buying gold bit by bit helps you to accumulate gold over a period of time to meet this social necessity, which is a sine qua non for almost every family in this country.
The basic human instinct of saving for a rainy day through the medium of gold is lost sight of by the architects of this Sovereign Gold scheme.
How to make it a roaring success?
There are several drawbacks as mentioned below in the present scheme which requires to be radically modified to make it attractive for the common people to invest in this scheme.
(a) One of the reasons for the poor response is the fall in gold prices during the period when the scheme was open for subscription. On 30th October, a week before the opening of the issue, the government announced the face value of the gold bond at Rs2,684 per gram for the entire period of 15 days when the issue was open for subscription. But when the issue opened on 5th November, the price of gold had fallen to Rs2,580 per gram and by Friday, the 20th November, when the issue closed, the price had fallen further to Rs.2548 per gram, which is almost 5% lower than the price fixed for the gold bond. Thus by subscribing to the bond at the higher price, one would have virtually lost the benefit of interest for the next two years. The solution is to announce the gold rate on a daily basis every day when the issue is open, so that the benefit of a fall in gold price, if any, during the issue period is passed on to the investor.
(b) At present, the interest of 2.75% p.a. paid on the bond is subject to income tax. This is the biggest disincentive for people to invest in these bonds. Since the redemption price of these bonds is uncertain, it is necessary to exempt from income tax the interest earned on these bonds, and this will encourage more and more small investors to invest in these bonds.
(c) As per the terms of the scheme, the sovereign bond is redeemed only in Indian rupees, and this is not what is desired by most of the investors. They invest in these bonds mainly with the purpose of getting gold in physical form when they need it for children’s marriage etc. at a future date without any hassles. Therefore, there is a need to give the bond holder the option of redeeming the bond through physical gold or in equivalent rupees, at the choice of the investor.
(d) The most irksome part of the scheme is that when you redeem these bonds, the proceeds are subject to capital gains tax, if the redemption price is higher than the price paid by you at the time of investment. The best solution is to provide exemption from capital gains tax, if the investors opt to redeem the bond through physical gold, in which case, the question of paying capital gains tax should not arise.
(e) The bonds in its present form are available to public only during the stipulated period fixed by the government without any concern for investor convenience. And the first tranche of these bonds were sold only for 15 days during November, 2015. There is a need to make this investment avenue available on tap to get maximum support from the general public.
(f) Apart from these draw backs, the Sovereign gold bonds are issued in paper form or certificates issued by the RBI mentioning the quantum (in grams) of gold purchased by the investor. The fact that the RBI had to defer the date of issue of bonds by a few days indicate that the paper work took a toll on RBI, which undertook issuing of these bonds in paper form, which was totally avoidable.
The best way to handle the gold scheme is through Authorised Banks:
The best way to handle this bond scheme is to ask authorised banks to open a Sovereign Gold account and issue a simple pass book to the investor showing the quantum of gold to his or her credit on the lines of an ordinary savings bank account. This method has the following advantages:
(a) The investors can purchase gold at their convenience if the scheme is kept open for sale on tap at the specified bank branches, with RBI announcing the daily rate at which banks can accept the deposit from public. The equivalent gold when purchased can be entered in the passbook as a record of balance held in the gold account of depositor.
(b) In order to provide flexibility for the depositor, the banks can continue to accept deposits in tranche of one gram of gold and thus allow the gold account to grow over a period of time into a larger corpus for redemption at a future date.
(c) The authorised banks can further innovate and provide different gold deposit schemes like Sovereign Gold account scheme, Gold Recurring deposit scheme, Gold fixed deposit scheme etc. with varying rates of interest and with different modes of payment and redemption as existing in variable deposit schemes. This will provide variety, flexibility and varying degree of suitability to the discerning investors in gold.
(d) And in all these type of gold accounts, the choice of redemption in physical gold, after the stipulated period, should rest with the investor so that h/she has the option to get gold in its purest form from the trusted source, without any questions being asked.
(e) Since most of the banks today sell gold coins, it is easy and simple for such banks to hand over gold coins of specified grams of gold as and when depositors want to redeem their gold deposits, thus serving the needs of depositors with great aplomb.
(f) If the gold accounts with passbook system is introduced, it will be the easiest way to handle gold deposit accounts, without the rigmarole of issuing duplicate certificates, if and when lost, and it will the simplest and most convenient form of investing in gold and getting physical gold when they need to the satisfaction of all the stakeholders.
This is, therefore, a suggestion to make it simple, flexible and convenient and most importantly what the investor wants, to ensure its roaring success.
(The author is a financial analyst, writing for Moneylife under the pen-name ‘Gurpur’)