Sovereign Gold Bond Scheme

Why in News?

Sovereign Gold Bonds 2020-21 (Series X) will be opened for the period January 11-15, 2021 with Settlement date January 19, 2021. The Government of India in consultation with the Reserve Bank of India has decided to allow discount of Rs50 (Rupees Fifty only) per gram from the issue price to those investors who apply online and the payment is made through digital mode. For such investors the issue price of Gold Bond will be Rs5,054 (Rupees Five thousand Fifty four only) per gram of gold.

Sovereign gold bonds

• Sovereign gold bonds are issued by the RBI on behalf of the government. They are government securities denominated in grams of gold. They are substitutes for holding physical gold.
• The sovereign gold bond scheme was launched in November 2015.
• Its objective is to reduce the demand for physical gold and shift a part of the domestic savings (used for the purchase of gold) into financial savings.
• Buy and Sale: Investors have to pay the issue price in cash and the bonds will be redeemed (bought back by the issuer) in cash on maturity
• Issue price is the price at which bonds are offered for sale when they first become available to the public.
• Apart from having a chance to gain from the rise in gold prices at the time of redemption (capital gain), the investor gets a fixed rate of interest on the investment amount throughout the tenure of the fund.
• Sovereign gold bonds are issued by the RBI on behalf of the government. They are government securities denominated in grams of gold. They are substitutes for holding physical gold.

• The sovereign gold bond scheme was launched in November 2015. Its objective is to reduce the demand for physical gold and shift a part of the domestic savings (used for the purchase of gold) into financial savings.
• Buy and Sale: Investors have to pay the issue price in cash and the bonds will be redeemed (bought back by the issuer) in cash on maturity
• Issue price is the price at which bonds are offered for sale when they first become available to the public.
• Apart from having a chance to gain from the rise in gold prices at the time of redemption (capital gain), the investor gets a fixed rate of interest on the investment amount throughout the tenure of the fund.
• The government will pay an interest at the rate of 2.5% per annum. The interest is payable semi-annually.
• Tenure: Sovereign gold bonds have a tenure of eight years, with exit options are available from the fifth year.
• Eligibility : The Bonds will be restricted for sale to resident individuals, Hindu Undivided Families (HUFs), Trusts, Universities and Charitable Institutions.
• The minimum permissible investment unit is 1 gram of gold.

Channels to buy bonds:
Investors can buy these bonds through designated scheduled commercial banks (except Small Finance Banks and Payment Banks), Stock Holding Corporation of India Limited, and designated post offices

One can also buy these bonds through National Stock Exchange of India Limited and Bombay Stock Exchange(BSE) Limited

Advantages and disadvantages

Advantages To the investor

the advantages to the investor in investing in SGB instead of gold are the following:

• Interest earnings on an otherwise dead asset.
• Sovereign gold bonds are considered one of the better ways of investing in gold as along with capital appreciation an investor gets a fixed rate of interest.
• Apart from this, it is tax efficient as no capital gains is charged in case of redemption on maturity.
• Sovereign gold bonds are a good way to ensure an investment that does not need physical storage of gold.

Disadvantages of sovereign gold bonds

• This is a long term investment unlike physical gold which can be sold immediately.
• Sovereign gold bonds are listed on exchange but the trading volumes are not high, therefore it will be difficult to exit before maturity. 

Advantages to the Economy

The advantages to the Government and the economy are the following:

• Reduction in the cost of Government’s borrowings- the current borrowing cost from the domestic market is around 7-8 per cent. Thus, an interest payment below this level is an yearly saving for the Government on account of its borrowing cost. This difference can be used by the Government to cover the appreciation of gold prices payable to the investors at the time of redemption. 
• A decrease in the price of the gold will be a gain for the Government.
• It will reduce the demand for physical gold to some extent and thus helps in reducing the annual demand for import of gold.

The possible disadvantage to the Government will be in the unlikely event of a substantial increase in gold prices. For this, the scheme proposes the creation of a Gold Reserve Fund which will absorb the price fluctuations and the fund will be continuously monitored for sustainability. Further, the issuance of the SGBs will be in tranches to enable the Government to maintain its issuance within its yearly borrowing limits.

Background
KUB Rao Committee Report
As per the KUB Rao Committee Report of 2013 , “large and sustained gold imports are a strain on the external sector’s stability. Given the precarious global economic situation and its impact on the Indian exports, there is a clear need to reduce the Current Account Deficit (CAD) considerably. Due to falling gold re-exports, India’s trade deficit as well as CAD as ratio to GDP worsened by 0.3 percentage points in 2011-12. Viewed from the fact that India has a large appetite for gold, it is desirable that the economy needs to moderate the demand for gold imports to bring down the CAD to a more sustainable level.” The Report also observed that ‘There is a need to consider introducing new gold-backed financial products to reduce the demand for physical gold.’

Rationale for a Gold Bond

India is one of the largest consumers of gold in the world and imports as much as 800-1000 tonnes of gold each year. It is estimated that roughly around 30 per cent of the import of gold in the country, on a yearly basis, is to meet the demand for gold for purely investment purpose. In this context the Finance Minister in the Union Budget 2015-16 Speech, made the following announcement:
Para 63. “I propose to: …
(ii) …develop an alternate financial asset, a Sovereign Gold Bond, as an alternative to purchasing metal gold.  The Bonds will carry a fixed rate of interest, and also be redeemable in cash in terms of the face value of the gold, at the time of redemption by the holder of the Bond. 
The demand for gold for investment purpose is due to the returns and ease that the metal provides vis-à-vis other investment instruments. Given these benefits, the demand for gold for ‘investment purpose’ can be shifted away from physical gold, only if an alternate financial instrument for investment, which is linked to price movements of gold is made available. The newly introduced Sovereign Gold Bonds scheme aims at achieving this objective.

Earlier Gold Bond Schemes

The Gold Bond schemes that have been launched by the Government of India, so far, have been based on the idea of accepting a deposit of gold from the customers and providing them with certificates (or bonds) for a fixed maturity and interest payment. These included the 15-year Gold Bonds at 6 1/2 per cent (November 1962), 7 per cent Gold Bond 1980 Scheme (March 1965), National Defence Gold Bonds 1980 (1965), Gold Bond Scheme (1993).The present scheme is different from the earlier schemes since it involves the issuance of a gold bond on payment of rupees instead of taking a deposit of gold.