Alternative Investment
Sovereign gold bond scheme may move investors from the yellow metals to bond
Sovereign gold bond could be more popular than gold ETFs and physical gold, says ratings agency 
 
Gold sovereign bonds being issued by the Reserve Bank of India (RBI) may triumph over other comparable products in the market such as gold exchange traded funds (ETF) and physical bars, and can lead to a reduction in India's current account deficit (CAD), says India Ratings and Research (Ind-Ra).  
 
"The sovereign gold bond scheme is an attractive product and may address the pure investment demand for gold. Also, gold sovereign bonds are easy to implement relative to the gold monetisation scheme," the ratings agency said in a research report.
 
 
Indian households’ fascination for gold is as old as India’s history and has only grown over the years. As a result, gold jewellery has been used both as an asset and as a hedge against adverse circumstances. The household investment in physical asset had risen to 66.4% in FY12 from 49.6% in FY06, before declining to 58.7% in FY14. The households’ fascination for gold however did not diminish much. Their savings in the form of gold & silver ornaments had reached Rs37,267 crore in FY13 before declining somewhat to Rs33,427 crore in FY14. This rising demand in gold was met by a huge increase in gold import to $56.5 billion in FY12. The surge in gold import was quite destabilising for India’s current account deficit (CAD) which increased to $88.1 billion in FY13, an unprecedented and unsustainable level of 4.8% of GDP. As a result, the government resorted to a higher import duty/restriction on gold import and gold import fell to $28.7 billion in FY14. 
 
 
The RBI will issue sovereign gold bonds between 5th and 20th November 2015, which would be linked to the price of gold. The objectives of sovereign gold bonds are (i) to reduce the demand for physical gold and (ii) shift part of the estimated 300 tonnes of physical bars and coins purchased every year for investment into ‘demat’ gold bonds. These bonds can be purchased only by resident individuals or entities and the upper limit could be 500gm per person per year. The bonds will be issued in denominations of 2g, 5g, 10g of gold or other denominations and the tenor of bonds could be for a minimum of five to seven years. The price of gold will be taken from the reference rate as decided. It will then be converted into Indian rupee using the RBI reference rate for issue and redemption. On maturity, the investor will receive the equivalent of the face value of gold in rupee. The scheme will carry an interest of 2.75% payable semi-annually.
 
According to a statement from the Finance Ministry, price of bond will be fixed in Indian rupees on the basis of the previous week’s (Monday–Friday) simple average of closing price of gold of 999 purity published by the India Bullion and Jewellers Association Ltd.
 
Talking about some of the pros of the sovereign gold bond scheme, Ind-Ra said that a successful launch of this product may ensure that physical gold is used mostly for manufacturing jewellery and sovereign gold bond for investments. It said, "Investors of gold bars or coins may find gold sovereign bonds a better investment than holding a physical stock because it will offer the benefit of gold without any handling and storage costs. It will relieve investors of the need to check the quality of gold and with valuation, no longer an issue, these bonds will be easier to use as collateral. In case of a gold bond, the counterparty is the government of India. If the price of gold increases, the government takes the risk of higher prices, if they fall, the investor would be given an option to roll over their holdings for an additional period."
 
The pros of the gold monetisation scheme include, the scheme offers all the benefits of physical gold minus the risk. It will convert the unproductive asset (lying idle) into a productive asset (used by the gems and jewellery sector). It will help in reducing the black economy, as gold along with real estate is often used as safe haven to park black money. The reduction in intermediary including speculators may be positive for stabilising gold prices. If the gold monetisation scheme turns out to be successful, then it will lead to a spurt in the supply of gold leading to a decline in gold prices, as the recycling of domestic gold will be without any import duty. Banks have some incentives in this scheme, like the freedom to decide interest rates on gold deposit and the ability to sell gold to raise foreign currency, it can also be part of statutory ratios. It will thus have a positive impact on the current account deficit, the ratings agency said. 
 
However, the sovereign gold bonds are beneficial only if it is bought for investment purposes, the ratings agency said. "As the bonds will be issued in denominations of 2g, 5g, 10g of gold, a minimum investment required would in the range of Rs5,000 and above. This means small investors will not be able to take advantage of this scheme unlike the case with gold ETFs or gold mutual funds (MFs). In case of sovereign gold bonds, both upside gains and downside risks will be with the investor. However, in case gold prices fall, losses from a systematic investment plan (SIP) in gold ETFs or gold MFs will be lower than for lump sum investments in sovereign gold bonds," Ind-Ra added. 
 
The cons of the gold monetisation scheme include, the scheme envisages holding gold only in its pure form, resulting in the melting of the deposited jewellery and ascertaining its pure gold value. This will be a disincentive for a large number of households who generally want to keep gold in the form of jewellery and may not want to see their long-preserved, family-inherited, emotionally attached, piece of gold lose its identity and feel, for meagre returns. Also, the jewellery making charges paid at the time of buying it will be lost in the process. Moreover, ascertaining of pure gold out of the jewellery will often result in lower valuation of the gold held by households. First, the loss of jewellery making charges and secondly lower valuation together will be a double whammy for households. There is also lack of clarity on the tax treatment, on the conversion of physical gold into the gold deposit scheme, the ratings agency said.
 
In addition, interest on the gold bonds will be taxable as per the Income Tax Act.
 
The gold monetisation scheme is also a welcome step taken by the government to unlock the value of gold held by households or institutions and to reduce the dependence of Indian investors and gems and jewellery sector on imported gold. Also, it is an improvement over the existing gold deposit scheme 1999.

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COMMENTS

Aqeel Qureshi

1 year ago

This scheme is quite dangerous to the Indian Government. To make the scheme viable, the Government is speculating on the price of Gold which is very dangerous and unscientific.

Like the last time when these bonds were issued, this time as well, the Government might make losses in the price of Gold and burn its hands.

REPLY

Anand Vaidya

In Reply to Aqeel Qureshi 1 year ago

I think the gov has done its calculations:

1)Gold prices may not rise, in fact may fall as US raises interest rates.

2) The gold consumption in China and India (too) are actually down

3) The relief gov gets in CAD+import bill may be sufficient to offset any losses in future on a/c of gold bond.

4) The gov gets cash now to spend (hopefully wisely)

Aqeel Qureshi

In Reply to Anand Vaidya 1 year ago

well, what you say calculations is actually called speculation.

Francis Xavier

In Reply to Aqeel Qureshi 1 year ago

Exactly Sir. Me too think on the same line. What will happen if the gold price doubles at the time of maturity? Expecting an article fm moneylife in this line.

MG Warrier

In Reply to Francis Xavier 1 year ago

The simple answer is, at the time of redemption, the investor will be paid on the basis of gold price prevailing at that time. The 'problem'for the government from this angle may arise only in respect of SGBS and the sale of bonds is part of GOI borrowings. Government shouldsupport RBI to increase the gold component in country's forexreserves to the extent of such borrowings(SGBS route) which will help set off losses of the type you are envisaging.

Aqeel Qureshi

In Reply to MG Warrier 1 year ago

Would that not be a silly and counterproductive thing to do? The government is doing this so that India does not spend forex to buy gold. And you are suggesting exactly that but this time the RBI does the same.

Its like the government does not want citizens to buy gold by spending dollars but the RBI does exactly that.

Does it make any sense at all?

MG Warrier

1 year ago

Perhaps RBI and GOI could jointly attempt an "Awareness Drive" to educate institutions and organisations which accumulate gold in various forms to divert a portion of their future investments to Sovereign Gold Bonds(SGBs). Even converting a portion of existing gold stock by selling it in the market and buying SGBs will be advantageous both to the country (as import will come down to that extent) and the investors(as the investment in SGBs will earn interest).

Sitaraman of SBI convicted 23 years after the Securities Scam of 1992 surfaced
Sitaraman who had helped Harshad Mehta as an SBI employee was convicted by the Bombay High Court, along with MS Srinavasan of State Bank of Saurashtra
 
On 23rd April 1992, when the Times of India first reported that Rs500 crore had been credited to the Big Bull’s (Harshad Mehta’s account) thanks to a missing SGL (Securities General Ledger) receipt, the man at the centre of it all was R Sitaraman, the manager. Over 23 years later, the Special Court set up for the expeditious trial of offences has finally delivered a verdict convicting R Sitaraman and a former chief manager of State Bank of India (SBI) and MS Srinivasan of State Bank of Saurashtra (SBS) in case 1 of 1996. Justice Roshan Dalvi, on her last day in office (30 October 2015) sentenced the two to four years rigorious imprisonment and a fine of Rs5 lakh each for criminal breach of trust and misappropriation of funds and under the Prevention of Corruption Act. The accused have also been asked to pay a compensation of Rs5 crore as compensation for embezzlement. 
 
The order says, Srinivasan and Sitaraman are “exposed and uncovered to have caused tremendous loss aggregating to several hundreds of crores of rupees to SBS and SBI unbefitting their position as public servants responsible to the public exchequer. They are seen to have degraded themselves in misappropriating public property for illegal and criminal ends causing enormous monetary loss to the public exchequer. Their acts can well be termed anti-national as such acts had caused a tremendous economic strain and drain upon the country resulting in the scam of 1992. The sentence against them must account for wanton economic loss to the country reflecting the deprecation for the subterfuge of accused A1 & A8 and the consequent conundrum caused to our country. They have not only corrupted themselves but corroded the country”.  
 
Sucheta Dalal, managing editor of Moneylife had broken that story in 1992. She later co-authored a book on the huge securities scam of 1992, titled The Scam, co-authored with Debashis Basu. The book starts with the desperate hunt for Mr Sitaraman by SBI’s vigilance chief at Palani near Coimbatore in Tamil Nadu, where he had gone for his son’s thread ceremony. This was after the Bank had discovered a gaping hole of Rs574 crore in the SGLs that it held.
 
The events that snowballed after the article was published engulfed the entire banking system and exposed the antiquated systems of the Reserve Bank of India (RBI) public debt office and dangers of brokers dominating the then powerful Bombay Stock Exchange (BSE). 
 
Some 23 years later, the Court has been able to deliver the verdict on that case. The first paragraph of the judgement itself points to the pointlessness of long-delayed judgements. Of the 22 accused facing trial, three were discharged, three are dead and only two are convicted after 16 were given the benefit of doubt.  Even here, the involvement of one of the two, is not very clear to those who followed and wrote about the case in details two decades ago. 
 
Justice Roshan Dalvi’s judgement has brought the curtain down on one act of this saga; the final act will be played out in the Supreme Court, probably after another long delay. Ironically, the Special Court at the Bombay was set up under a new act for “expeditious” hearing of the scam cases. Of course, scams of far bigger magnitude have occurred in the country since the securities scam of 1992. 

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COMMENTS

vswami

1 year ago

Addendum:
wrt the readers' outburst in the form of comments on the over 2 decades delay, in the court delivering its verdict, what is more puzzling is the 'reaction', rather than the delay grieved about.

Why should one say so? For finding an answer,simply have in view:

Q

We, as a nation, have some fine qualities but a sense of the value of time is not one of them. Perhaps, there are historical reasons. Ancient India had evolved the concepts of eternity and infinity. So what do years wasted in a litigation matter against the backdrop of eternity. Believing in incarnation, what does it matter if you waste this life. You will have many more lives in which to make good.

Our cases drag on over a length of time which makes eternity intelligible

The law may or may not be an ass but is certainly a snail; cases proceed at a pace as unduly slow in a community of snails.

Justice has to be blind but I see no reason why it should also be lame; here it just hobbles along, barely able to walk.

UQ

(A narration from Palkhivala’s published speech (1987) - "The Judiciary and the Legal Profession", in the Book- We, the Nation THE LOST DECADES)

Key Note: It is commonly believed, rightly or wrongly, that the root cause lies in the fact -of -life- for -ages that 'human being', created as the only supposed-to-be rational of all, is still in the process of 'evolution'. Should , however, anyone not mind to go by the wisdom gathered in hindsight,the imponderable requiring an attempt to find an answer is-what is right word to appropriately signify just the reversed process ?!


Hemlata Mohan

1 year ago

If in such an important case where a Spl Court was constituted took 23 years to deliver the verdict,what can the common man expect from the normal courts?
Shame on us!

Mahesh S Bhatt

1 year ago

Stupid delayed justice loses meaning/sense.

Why Judges are getting strength in giving correct judgements on last day pf their tenure is also worth examining.

Sucheta another success Congrats.

Can we have time defined justice like USA?

What laws we need to implement to make it happen is Sucheta your expertise advice GOI/Law Ministry.

Mahesh

vswami

1 year ago

IMPROMPTU

Makes for an utterly disgustful read; essentially the extremely wanting / utter absence sense of 'time' and failure of conscious noting of its value, to the humanity at large!

Is it not an obvious instance of proverbial, - HEAD i win, TAIL you lose ?!

POINTS (in abundance) To Ponder:

WHAT IS AILING THE humanity AT LARGE today, more than ever before?

A very useful article,- not to miss any word, or line, or underlying message, to be so found if individual's own mind./brain/ intellect / conscience lends scope to so FIND / REALIZE impromptu – for “SELF MOTIVATION” culminating in "self-improvement" , to start with !

< Latest on "PERSONAL EXCELLENCE"
https://in-mg61.mail.yahoo.com/neo/launch?.rand=ac5t8btc33jvl#1843571739

And many, many more- particularly to anyone being a 'public servant', in its most comprehensive sense, - those in PSBs being no exception,to the rules and norms of profound 'ethical behavior'




SuchindranathAiyerS

1 year ago

Throughout the World, the Judiciary exist to shut the stable doors after the horses have fled. But India's judiciary excel. They shut the doors after the stable has collapsed. I was informed by a Senior Advocate that India's courts make a habit of adjourning and delaying cases not because of their incompetence or incapacity to read English, add, subtract, know the law or assess evidence, but, because, they hope that given enough time, the parties will come to an amicable settlement or resign themselves to their fate. This judicial disregard for the rule of law, combined with the Police disinclination to enforce the rule of law encouraged by India's grotesque Constitution and laws have resulted in India. 143 out of 172 countries in Internal Peace and Stability in just 69 fell years.

Vaibhav Dhoka

1 year ago

India is country of belated justice.23 years is more than One generation.Therefore common man avoid to climb staircase of Judiciary as no one can predict when justice will be delivered.As all sectors in life is infested with corruption,judiciary is more infested with corruption and sword of contempt is used to suppress common man's voice.

Sunil Rebello

1 year ago

here justice served late - is better than not served.
but the delay is also criminal. our justice system requires a complete overhaul - in order that justice can be delivered on time to serve its purpose.
by now Srinivasan and Sitaraman may be nearing their life end.
Sucheta Dalal and Debashis Basu this was one of your early scoops.. which you kept building on every day and every year.
May the good Lord bless you both with Good Health and peace of mind.

REPLY

Shirish Sadanand Shanbhag

In Reply to Sunil Rebello 1 year ago

I fully agree with Sunil Rebello's views.
How Court will recover the fine from these two culprits is a moot question.
My best wishes to Sucheta Dalal & Dedbashish Basu, for their perseverance, for all these years with judicial proceedings.

Lessons from Bejing: Why India must rethink industries, technology
As I write this, I spot over a dozen Chinese men outside my Beijing hotel room wearing air purifier masks on their faces - the price they paid for technology. It stirred some alarming thoughts about where India is heading, and why India has a need to rethink each of its steps towards technological advancement.
 
In this world of homogenization, all metros seem the same, Berlin to Beijing - glittering malls, tall building, fast food and speedy cars.
 
Beijing was also no different from Delhi except for Mandarin on its billboards and it gave the look of what Delhi could be few years ahead -- high speed metros, better looking cars, better looking buildings, cleaner and orderly streets, but men much petite.
 
As high as my expectations were, from a country pioneering in technology, to be battling its pollution levels and other effects of technology, the country seemed to have lost equally bad in its struggle.
 
Living in Delhi, pollution was something which I could see around, but Beijing also got me to experience it. As soon as I stepped out of the airport, my nostrils were flaring up, being an asthma fighter, immediately finding it difficult to breathe. Although there have been attempts from the Chinese government -- denying registrations to older cars and factories -- to fight their pollution monster, the issue seems to be not all that simple to settle the fight.
 
Some of China's pollution fighting technologies earlier, which ran on coal-generated electricity, thereby contributed to higher carbon emissions although air quality would get better - a technology to fight another technology.
 
Result was the sight of a huge population - young to old - donning air purifiers, attempting to breathe cleaner air. Although these air purifiers could filter particulate contaminants in the air there is no evidence that these filters could help in long-term.
 
According to the US Department of State Air Quality Monitoring Program's 'Mission China', the air quality index for Beijing on any average 24 hours of a day shows "unhealthy for sensitive groups" - nearly as unhealthy as smoking 40 cigarettes a day, as per a study.
 
The classic Tiananmen Square and the Forbidden City shots at night that I sought as a tourist were rather hazy owing to the smog and were tough to crack them right.
 
The average PM2.5 levels figured between 101-150, as against the safe 0-50 level, and even touched the '"unhealthy" level (151-200) at night. These levels, according to the department, means "active children and adults, and people with respiratory disease, such as asthma, should limit prolonged outdoor exertion"
 
India, which is still on its road to technological advancement, aims at replicating the Chinese ways, be it "Make in India", be it attracting Foreign Direct Investments (FDI) for its industries and businesses. But its capital city Delhi's air pollution already has touched "hazardous" levels.
 
As per the Delhi Pollution Control Committee, the PM2.5 levels in Delhi's air are always above the prescribed safe levels of 60 with an average of 100 units of particulate matter pollution in the air, reaching levels as high as 300 during winters. Delhi has bagged the spot of its competitor Beijing, which was considered to be the most polluted city for long.
 
According to a World Health Organization study last year the concentration of PM2.5 was higher in Delhi than in Beijing, proving Delhi to have the filthiest air in the world.
 
Shouldn't these be indicators for India to rethink technology, industries?
 
Beijing has now assumed its path of green energy, and shut some of its conventional coal-run industries, electricity out of coal to adopt gas-run methods and other non-conventional methods and has improved its air quality much better than before.
 
It was a much needed move for Beijing, to have cleaner means of transportation. A simple move to have "only bicycle" track has helped Beijing a lot - persuading many to use their bicycles or electric bikes. On a majority of the days, there were more bicycles than there would be cars on the road, a solution Delhi needs.
 
Whereas studies on Delhi have been bringing out even horrific angles to the city's pollution. The most recent study by University of Surrey shows that Delhi's air has a "toxic blend" of geography, poor energy resources and unfavourable weather that dangerously "boosts" its pollution.
 
Delhi, I hope you're listening.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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COMMENTS

Silloo Marker

1 year ago

The above article on very high pollution levels in China and now in Delhi, creates fear of worse things to come unless we clean up our act. Fear seems to be the key to a lot of things we do or not do in life today. This clouds our thinking and does not allow us to work out reasonable solutions with a calm mind. Breathing clean air is not just the responsibility of some government, it can only happen if everyone decides to drive less and walk more, to share more (yes, even one's prized car or TV or computer), to take what one needs and not give in to greed. Technology does not play a part till people put some common sense into play first. Silloo Marker

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