Sovereign gold bond scheme liberalised

Multifold increase in holding limits; bonds will be available on tap

The Union Cabinet approved significant liberalisation of the sovereign gold bonds (SGBs) scheme. It decided to increase multifold the holding limits and to make bonds available on tap. The investment limit in each financial year has been increased to four kg for individuals or a Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities as notified by the government. At present, the annual individual limit for buying bonds is 500g. The annual ceiling will include bonds purchased from stock exchanges.

However, the ceiling on investment will not include the holdings as collateral by banks and financial institutions. An expert said this provision makes the holding rules more liberal, as bonds get 2.5 per cent annual interest on the amount invested and when these are pledged, further funding will be available for doing other commercial or investment activities, further generating interest.

The expert added the short-term funding available against physical gold jewellery pledging can be available for bonds, putting both on equal footing.

The government announcement, made after the Cabinet decision, further said “SGBs will be available 'on tap’. Based on consultation with NSE, BSE (the major stock exchanges), banks and the department of post, features of the product would be finalised.”

The Cabinet also decided to allow flexibility to the ministry of finance to design and introduce variants of SGBs, with different interest rates and risk protection/pay-offs that would offer investment alternatives to different categories of investors.

At present, the bonds are listed on the exchanges a month after these are issued. However, they are not liquid and, hence, raising funds in an emergency by selling bonds is not a practice. Hence, the Cabinet decided, “to improve liquidity and tradability of SGBs, appropriate market making initiatives will be devised. Market makers could be commercial banks or any other public sector entity, such as MMTC or any other entity as decided by the government.”

Target mobilisation under the scheme was ~15,000 crore in 2015-16 and ~10,000 crore in 2016-17.

The amount so far credited in the government account is ~4,769 crore. This response is much below expectations and the gold import trend in the past six months had been alarming.