Sovereign Gold Bonds (SGBs)

  • November 21, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Sovereign Gold Bonds (SGBs)

Subject: Economy

Section: External sector

Sovereign Gold Bonds (SGBs) introduced in India in FY16 as an alternative to physical gold investments.

  1. Introduction of SGBs: SGBs were introduced in response to a forex crisis partly caused by high gold imports. The bonds allow investors to hold gold without the need for physical import.
  2. Features of SGBs:
    • Denominated in rupees and linked to the domestic gold price.
    • Provides an assured return of 2.5% on the principal along with potential capital gains.
    • Issued by the sovereign, carrying zero risk of default.
  3. Purpose of SGBs:
    • Aimed to reduce the demand for physical gold by offering similar advantages through bonds.
    • Expected to be successful for investors seeking gold as an investment.
  4. Performance of SGBs:
    • Over an eight-year period, 122 tonnes of gold equivalent bonds were issued.
    • SGB subscriptions increased during the pandemic, coinciding with a rise in gold prices.
    • However, the volume of bonds issued is only 1.8% of the total gold imports (7,003 tonnes) during the same period.
  5. Challenges and Limited Interest:
    • Interest in SGBs has been limited.
    • Challenges include the cultural significance of physical gold, anonymity in holding physical gold, and the appeal of gold’s ‘snob’ value.
  6. Comparison with Gold ETFs:
    • Gold ETFs have not seen significant growth despite steady growth in assets under management (AUM).
    • Financial alternatives, including Gold ETFs and SGBs, have not matched the appeal of physical gold holding.
  7. Government Initiatives:
    • The government has attempted to encourage people to move from physical gold to financial instruments.
    • Electronic Gold Receipts (EGRs) and a vibrant futures market for gold derivatives on MCX are among the initiatives.
  8. Challenges in Shifting Preferences:
    • The progress has not been significant, and households still prefer holding physical gold as a form of saving.
    • Financial options like SGBs and EGRs are not widely accepted, especially in cultural practices like weddings.

Sovereign Gold Bonds (SGBs) Scheme

  1. Issuance:
    • Issued by the Reserve Bank of India on behalf of the Government of India.
  2. Eligibility:
    • SGBs will be restricted for sale to resident individuals, HUFs (Hindu Undivided Family), Trusts, Universities, and Charitable Institutions.
  3. Tenor:
    • The tenor of the SGB will be for a period of eight years with an option of premature redemption after the 5th year.
  4. Minimum Size:
    • Minimum permissible investment will be one gram of gold.
  5. Maximum Limit:
    • The maximum limit of subscription:
      • Individuals: 4 Kg
      • HUF: 4 Kg
      • Trusts and similar entities: 20 Kg per fiscal year (April-March)
  6. Joint Holder:
    • In the case of joint holding, the investment limit of 4 Kg will be applied to the first applicant only.
  7. Issue Price:
    • The price of SGB will be fixed in Indian Rupees based on the simple average of the closing price of gold of 999 purity, published by the India Bullion and Jewellers Association Limited (IBJA).
  8. Sales Channel:
    • SGBs will be sold through Scheduled Commercial banks, Stock Holding Corporation of India Limited, Clearing Corporation of India Limited, designated post offices, National Stock Exchange of India Limited, and Bombay Stock Exchange Limited, either directly or through agents.
  9. Interest Rate:
    • Investors will be compensated at a fixed rate of 2.50% per annum payable semi-annually on the nominal value.
  10. Collateral:
    • SGBs can be used as collateral for loans.
  11. Tax Treatment:
    • The interest on SGBs shall be taxable as per the provisions of the Income Tax Act, 1961. The capital gains tax arising on redemption of SGB to an individual is exempted.
  12. Tradability:
    • SGBs shall be eligible for trading.
  13. SLR Eligibility:
    • SGBs obtained by banks through the pledge process will be considered as part of their Statutory Liquidity Ratio requirements.

India Bullion and Jewellers Association Ltd. (IBJA):

  • Established in 1919, IBJA is an association for bullion traders in India.
  • Considered the apex association for all bullion and jewellery associations in India.
  • Publishes daily Gold AM and PM Rates, which are benchmark rates for issuing Sovereign and Bonds.
  • Involved in promoting trade through exhibitions and is setting up its own Domestic Gold Spot exchange, Bullion refinery, and gems & jewellery park.
  • Assists its members in promoting and regulating bullion trade, resolving disputes, providing a neutral platform for weighing precious metals, and interacting with government departments.

Gold Exchange Traded Funds (ETFs):

Overview:

  • Gold ETFs are passive investment instruments designed to track the domestic physical gold price. They invest in gold bullion and are units representing physical gold in paper or dematerialized form.
  • Each gold ETF unit is equivalent to 1 gram of gold and is backed by physical gold of high purity.
  • These funds combine the flexibility of stock investment with the simplicity of gold investments.

Exchange Traded Fund (ETF):

  • An ETF is a basket of securities traded on an exchange, similar to a stock.
  • ETFs reflect the composition of an index (e.g., BSE Sensex) and their trading value is based on the Net Asset Value (NAV) of the underlying stocks.
  • Unlike mutual funds, ETFs can be bought and sold throughout the trading day.
  • ETFs can own a diverse range of stocks across various industries or focus on a specific industry or sector.
  • Bond ETFs include government bonds, corporate bonds, and municipal bonds, offering a cost-efficient and diversified investment portfolio to investors.
economy Sovereign Gold Bonds (SGBs)