To curb surge in imports, Centre unveils sovereign gold bonds

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Based on the current market price, issuance of gold bonds equivalent of 50 tonnes would be around Rs 13,500 crore, a discussion paper floated on the scheme said. Japanese financial services firm Nomura has estimated that these bonds provide a good alternative for investors and if subscribed fully in the first year, it will result in a saving of $2 billion on imports of the precious metal at current prices.

“Since the amount is not very high, it can be accommodated within the market borrowing programme for 2015-16,” the paper said adding that 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 draft added.

The draft follows the budget announcement wherein finance minister Arun Jaitley had said that though stocks of gold in India are estimated to be over 20,000 tonnes, most of it is neither traded nor monetised. “I propose to… develop an alternative financial asset, a sovereign gold bond, as an alternative to purchasing metal gold,” he had said while also announcing a gold monetisation scheme to help investors earn interest on the gold they owned.

“If the scheme is fully subscribed in the first year, then it will represent 27 per cent of the 2014 investment demand,” Nomura said in a report, adding that in 2014, the total investment demand for gold moderated to 180 tonnes from an average annual demand of 345 tonnes from 2010 to 2013.

The draft report said that the bonds will be issued in 2, 5, 10 grams of gold or other denominations with a proposed tenor of minimum 5-7 years so as to protect investors from medium-term volatility in gold prices.

The bonds will be issued with a nominal rate of interest, linked to international rate for gold borrowing and an indicative lower limit of 2 per cent may be given but the actual rate will have to be market determined.

On maturity, the investor will receive the equivalent of the face value of gold in rupee terms. Market insiders said that the bonds are unlikely to take off if the rate of interest remains around 2 per cent given high inflation of almost 5 per cent in the country.

India is the world’s largest consumer of gold and imports around 800-900 tonnes of the yellow metal annually. During May, gold imports grew 10.47 per cent to $2.42 billion. Such bonds will be issued by RBI on behalf of the government and the issuing agency will need to pay distribution costs and a sales commission to intermediate channels, to be reimbursed by the government.

However, the upside gains and downside risks will have to be borne by the investor, who needs to be aware of the volatility in gold prices, the paper said.