Gold investment schemes: do they fit nowhere into regulations?
Nivedita Shankar 07 January 2014

Gold investment schemes are completely unregulated. In this scenario, the lingering question is what if the company or jeweler goes into liquidation? Will the investors’ money ever be returned?

The spurt of gold investment schemes has grabbed the attention of many. The gold investment schemes which offer interest at the end of the tenure as contribution by the company require the same to be redeemed against jewellery only. However, what is forgotten in this mad rush is that such schemes are completely unregulated. Recent public interest litigation (PIL) questioned the legality of these very gold investment schemes.


Such gold purchases schemes require the investor to put in money for say 11 months and the installment for the 12th month is put in by the company. Thus, the interest is nothing but the last installment which the investor earns. Although, such schemes claim that cash refunds will not be possible, yet in a way it is cash in the form of the 12th installment that the investor gets back. Such schemes not only ensure that the investor remains tied to the company but also that the company always has a steady inflow of money.


Although, there apparently seems to be nothing wrong in such schemes, yet the lingering question is what if the company goes into liquidation? Will the investment ever be returned? The terms of such schemes clearly mention that no cash refund is possible. The question becomes even more daunting to answer considering that such schemes are completely unregulated. According to a media report, both Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI) have replied to a Right to Information (RTI) application stating that such schemes are not regulated by them at all. It is however, difficult to believe how the regulatory bodies could take such a stand. Here are few regulations which rebut this stand of the regulatory bodies.


Collective Investment Schemes (CIS)


The SEBI Act, 1992 gives the market regulator power to regulate the working of schemes which are in effect CIS and have the following characteristics:

  1. Pooling of money;
  2. Entrustment of money to someone such that the investors are not the ones who are managing their own money; and
  3. Sharing of returns from a specified investment.

The same is taken as a CIS and such schemes have to be necessarily registered with SEBI (). In the recent ruling of Maitreya Services (P.) Ltd. vs Securities and Exchange Board of India, the Securities Appellate Tribunal (SAT) stated the following:


In my view, a typical real estate business might satisfy one or more but not all of the above four conditions. In common parlance, in a real estate business the agreement to sell is executed for purchase of the immovable property that is identified and distinguished. Right, title and interest of purchaser in the identified and distinguished immovable property is created at the time of executing the agreement to sell. This real estate business entails a contract to buy and sell immovable property rather than an investment contract involving investment with a view to receive the predetermined returns as in the schemes/plans of MSPL. Further, in real estate business the contributions might be pooled but may not be necessarily utilized for the purposes of development of the property. The property might be already identified, acquired and/or developed and thereafter the payments might be received against different stages of construction. In a real estate transaction, the purchaser gets title to the property, and he can transfer the same before getting possession. Further, he may be given participation in development by consulting him on amenities, facilities and quality of constructions etc. Thus, he gets certain amount of accessibility to the property.”


The SAT in this case held that the alleged real estate business was actually a CIS not only because it fulfilled all criteria under section 11AA of SEBI Act, 1992 but also that the end product should be identifiable and distinguished.


Under such gold investment schemes, the obligation is only on purchase of jewellery. The type of jewellery, the quality of gold purchased are never predetermined and neither identified at the beginning of a scheme. In fact a recent ruling by Bombay High Court in the case of Sandeep Badriprasad Agrawal vs Securities and Exchange Board of India and others, the High Court struck down the PIL on the ground that there was no public interest at all. It further stated that such schemes were commercial transactions between a businessman and consumer and the consumer was voluntarily taking part in the scheme.


Although, the Bombay High Court has taken a very conservative look in Sandeep Badriprasad (supra) case, and since such gold purchase schemes are not contribution of money or sharing of returns from investments, they may not be a CIS. However, the High Court could have gone further to see the real intent behind such schemes, which is nothing but “loan in substance.”




Deposit under the Companies (Acceptance of Deposit) Regulations, 1975 is defined to mean:

means any deposit of money with, and includes any amount borrowed by, a company, XXX”


Typically what a company borrows is construed to mean loan. Further, section 45I (bb) of The Reserve Bank of India Act, 1934 defines deposit to include a loan. As a loan includes a transaction which is nothing but in substance a loan, hence a loan in substance is also to be construed as deposit within this ambit. For this reason, it is important to look into a transaction in depth to know whether the transaction is a loan in substance or not. In his Judgment in Fateh Chand Mahesri vs Akimuddin Chaudhury, Mitter J observed as follows:


“If in a transaction there is no actual advance but only a notional advance -- what a Court of law would deem to be an advance -- with a view to earn interest, the transaction would be regarded as loan for the purpose of the Act. A renewed bond where interest is capitalised would thus be a loan although at its execution no money is actually advanced. In order to determine the question whether a particular transaction amounts to a loan the substance and not the form must be looked to and the facts and circumstances attending it must be taken into consideration. If the conclusion be that it was really an interest bearing investment it would be a loan." (For more read: )

The substance of gold investment schemes is nothing but a loan. The investors under such schemes approach the investor to pay few installments and the investor on its part pays interest in the form of last installment. Thus, what the company takes up is monetary liability. Since, the amount of gold to be purchased is not fixed at the time of first deposit itself, it is only money which is earning money. Although, the companies may claim that the amount invested in put in fixed deposits to ensure safety of return, however what happens of the interest earned is anybody’s guess – i.e. deployed as to fulfill the working capital needs of the company.


The discussion’s attempt was to highlight that how under the garb of assured returns, the gold purchase schemes continue to thrive and that too unregulated. It is even more surprising to see the stand of regulatory bodies on such cases. Take the case of enactment of SEBI (CIS) Regulations, 1999. The Dave Committee suggested the enactment of the stated regulations to regulate the fast mushrooming agro bonds, plantation bonds and the investments in such bonds. The outlook of any policy maker should ideally be what the law should be rather than what the law is. If any existing scheme is such that it requires immediate attention and possible regulation, then the need has to be met. Thus, the contention that such schemes being private commercial arrangements are outside regulatory ambit is rebuttable. Hoping that the regulatory bodies do not wake from their slumber after a Saradha like incident happens to understand that such schemes are well within regulatory ambit and should be rightfully regulated.


(Nivedita Shankar is a Company Secretary and works as senior associate at Vinod Kothari & Company)

10 years ago
Its difficult to understand why these schemes are not covered under CIS and regulated by SEBI. Whats the guarantee that the Company will pay the 12th installment and honour its commitment to repay in form of gold. If the Company doesn't honour its commitment as an Investor which regulator to approach to? Both RBI and SEBI cant shriek away from their responsibility. Even established brands like Tansisq a Tata group Company are following this business model. Its high time these schemes are regulated to avoid another Big duping story.
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