Sovereign Gold Bonds Scheme Current Affairs
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Union Government has opened new series of sovereign gold bonds scheme for subscription. Under this scheme, sovereign gold bonds will be issued every month from October 2018 to February 2019. This bond will be sold through Stock Holding Corporation of India Limited, Post Office, Stock Exchange (NSE and BSE).
Sovereign Gold Bond (SGB) Scheme
It is aimed at providing alternative to buying physical gold. Under it, bonds are denominated in units of one gram of gold and multiples thereof. These gold denominated bonds are restricted for sale to resident Indian entities, including individuals, Hindu undivided families (HUF), trusts, universities and charitable institutions.
The minimum subscription for individual and HUF is 1 gram and maximum is 4 kg. For trusts and similar entities, maximum subscription is 20 kg per fiscal. Price of bond is fixed in rupees on basis of simple average of closing price of gold of 999 purity published by India Bullion and Jewellers Association Limited for last 3 working days of week preceding the subscription period.
The tenor of SGB bonds is 8 years with provision of premature cancellation after 5 years on interest payment dates. Investors in SGB bonds have been provided with option of holding them in physical or dematerialised form. RBI has notified rate of interest of 2.50% per annum on SGB bonds is payable on half yearly basis.
The bonds can be used as collateral for loans and loan-to-value ratio is set equal to ordinary gold loan mandated by RBI from time to time. Individual investing in it are exempted from capital gains tax arising on redemption of SGB. The indexation benefits are also provided to long-term capital gains arising to any person on transfer of bond.
The Union Cabinet has approved revision of guidelines of Sovereign Gold Bonds (SGB) Scheme with a view to achieve its intended objectives.
Need for Changes
The Union Government had launched SGB Scheme to develop a financial asset as an alternative to purchasing metal gold. The target of the scheme was to shift part of the estimated 300 tons of physical bars and coins purchased every year for Investment into ‘demat’ gold bonds.
The mobilisation target under the scheme was Rs. 15,000 crore in 2015-16 and at Rs.10,000 crore in 2016-17. However, the amount so far credited in Government account is Rs. 4,769 crore. The above changes were made in view of less than expected response of the investors to the scheme and considering its bearing on CAD and consequently on overall macro-economic health of the country. Government has approved two sets of changes in the scheme. They are
Specific changes in the attributes of the scheme: It aims to make it more attractive, mobilise finances as per the target and reduce the economic strains caused by imports of gold and reduce Current Account Deficit (CAD).
Flexibility to design and introduce variants of SGBs: Ministry of Finance (the issuer) has been given flexibility to design and introduce variants of SGBs with different interest rates and risk protection that will offer investment alternatives to different category of investors. Finance Ministry has been delegated this power to amend (or add new features) of the Scheme to reduce the time lag between finalizing the attributes of a particular tranche and its notification. Such flexibility will help to address the elements of competition with new products of investment and deal with very dynamic or volatile market, macro-economic and other conditions.
Specific approved changes
The investment limit under the scheme per fiscal year has been increased to 4 kg for individuals, 4 Kg for Hindu Undivided Family (HUF) and 20 Kg for Trusts and similar entities notified by the Government. The ceiling will be counted on financial year basis and will include the SGBs purchased during the trading in the secondary market.
The ceiling will not include the holdings as collateral by Banks and Financial institutions. Ministry of Finance will finalise ‘On Tap’ sale features of SGBs based on the consultation with NSE, BSE, Banks and Department of Post. Moreover, appropriate market making initiatives will be devised to improve liquidity and tradability of SGBs.