Sovereign Gold Bond Scheme: 4th tranche collection goes up to Rs.920 crores; reduces attraction to physical gold

Columnist & Author, MBAUniverse.com

Updated on August 2, 2016

Sovereign Gold Bond (SGB) Scheme 2015 is making more news after collecting Rs.920 crores from the recent issue of the 4th tranche of bonds

SGB is an innovative and unique step introduced by Government of India in the Union Budget 2015 16 with the aim to reduce demand, including through imports, for physical gold

The hot current affairs topic – Sovereign Gold Bond (SGB) Scheme 2015 is making more news after collecting Rs.920 crores from the recent issue of SGBs 4th tranche. Apart from the earlier 3 tranches in 2015-16, the government in consultation with RBI launched the 4th tranche, which remained open from July 18 to 22.

GK questions in recent entrance exams including MBA entrance tests have been framed on this scheme and it is expected that aspirants may encounter more questions on SGB in IIFT, SNAP, XAT and other MBA entrance exams.

Questions on GK or General Awareness form an important section with a weightage of 15 to 25% in almost all the national level MBA entrance tests. They are also the source of discussion during GD, PI, WAT, Extempore topics for MBA admission in IIMs, FMS, MDI, SPJIMR, XLRI and other highly ranked institutes.

MBAUniverse.com has begun with a unique initiative of publishing a series of current GK topics to benefit the MBA aspirants to know more about the current national and global environment that become the source of GK questions. The next in the series is Sovereign Gold Bond Scheme.

What is SGB?
Sovereign Gold Bonds (SGBs) are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of Government of India. SGB is an innovative and unique step introduced by Government of India in the Union Budget 2015-16 with the aim to reduce demand, including through imports, for physical gold, and in process reduce India’s current account deficit (CAD) while investor gets benefit of earning interest also.

The bonds would carry a fixed rate of interest, and also be redeemable in terms of the face value of the gold, at the time of redemption by the holder of the bond.

SGB: Origin and Launch
The Sovereign Gold Bond Scheme was launched in November 2015 by the Government of India.

In his Budget 2015-16, Union Finance Minister Arun Jaitley proposed to launch the Sovereign Gold Bond Scheme to reduce imports of physical Gold and to reduce the demand for the yellow metal in physical terms.

SGB: Salient features

-- The Sovereign Gold Bonds are available both in demat and paper form.

-- The tenor of the bond is for a minimum of 8 years with option to exit in 5th, 6th and 7th years.

-- SGBs carry sovereign guarantee both on the capital invested and the interest.

-- Bonds can be used as collateral for loans.

-- Bonds are allowed to be traded on exchanges to allow early exits for investors who may so desire.

-- Capital gain tax arising on redemption of SGB to an individual has been exempted. The indexation benefit will be provided to LTCG arising to any person on transfer of bonds. The department of revenue has said that they will consider indexation benefit if bond is transferred before maturity and complete capital gains tax exemption at the time of redemption.

-- To improve attractiveness of the scheme, new features were introduced in the latest instalment (4th tranche) where the minimum subscription limit was brought down to 1 gm from 2 gm.

-- SGB offers the same benefit as physical gold as investors get returns that are linked to gold price.

Interest on SGB
Sovereign Gold Bonds have a fixed rate of interest i.e. at 2.75 percent per annum on the amount of initial investment. The interest on the Gold Bonds shall commence from the date of its issue.

Who issues the SGBs?
The Bonds are issued by the Reserve Bank of India on behalf of the Government of India. The bonds are distributed through banks and designated post offices. This makes subscribing to the bonds an easy affair. During redemption, "the price of gold may be taken from the reference rate, as decided, and the Rupee equivalent amount may be converted at the RBI Reference rate on issue and redemption".

Designated offices of SBI, NSE, Bank of India, ICICI Bank, HDFC Bank are a few among the many who are authorised to issue Sovereign Gold Bonds.

SGB: Minimum & Maximum investment
In the 4th tranche the minimum denomination of investment was reduced from 2 grams of gold to 1 gram. Earlier 3 tranches required the minimum investment of money equivalent to 2 grams of Gold. Maximum buying limit is 500 grams per person per fiscal year (April – March). In case of joint holding, the limit applies to the first applicant.

SGB: Issue denomination
SGBs are issued in denominations of one gram of gold and in multiples thereof

Protection to Investment
The quantity of gold for which the investor pays is protected, since he receives the ongoing market price at the time of redemption/ premature redemption. The SGB offers a superior alternative to holding gold in physical form. The risks and costs of storage are eliminated. Investors are assured of the market value of gold at the time of maturity and periodical interest. SGB is free from issues like making charges and purity in the case of gold in jewellery form. The bonds are held in the books of the RBI or in demat form eliminating risk of loss of scrip etc.

There may be a risk of capital loss if the market price of gold declines. However, the investor does not lose in terms of the units of gold which he has paid for.

Growing popularity of SGBs
Rs.920 crores have been realised in just 5 days of keeping the 4th tranche of GSBs open from July 18 to 22, 2016. This is the highest amount realised in a single tranche. Earlier 3 tranches were released in FY 2015-16 in the months of November 2015, January 2016 and March 2016. There were 1.95 applicants who subscribed to GSBs equivalent to about 2.95 tons of gold. The issue price for 4th tranche was kept at Rs.3119/- per gram.

In earlier 3 tranches, the second tranche garnered the highest amount of Rs. 746 crores. The issue price was Rs.2600/- per 1 gram of gold. Total subscription in the first 3 tranches was Rs 1,318 crore representing to 4.9 tonnes of gold.

Who can subscribe to SGB?
Any Resident Indian of the following categories:

Individuals, singly or jointly (as Former or Survivor)