Issue Price Rs. 2,971– per gram
The Sovereign Gold Bonds Scheme announced in Budget 2015-16 is intended to reduce the demand for physical gold by shifting a part of the estimated 300 tons of physical bars and coins purchased every year for Investment into gold bonds. Since most of the demand for gold in India is met through imports, this scheme is implemented to help in maintaining the country's Current Account Deficit within sustainable limits. The issuance of the Sovereign Gold Bonds is within the government's market borrowing programme for 2015-16 and onwards. The actual amount of the issue is determined by RBI, in consultation with the Ministry of Finance. The risk of gold price changes will be borne by the Gold Reserve Fund. The benefit to the Government is in terms of reduction in the cost of borrowing, which will be transferred to the Gold Reserve Fund.
Sovereign Gold Bonds are issued on payment of rupees and denominated in grams of gold. Bonds issued on behalf of the Government by the RBI. has a sovereign guarantee. The issuing agency. The bond is restricted for sale to resident Indian entities. The cap on bonds that may be bought by an entity would be at a suitable level, not more than 500 grams per person per year. The rate of interest is decided by the Government, depending on the domestic and international market conditions and it varies from one tranche to another. This rate of interest will be calculated on the value of the gold at the time of investment. The rate could be a floating or a fixed rate, as decided.
The Gold bonds are available both in demat and paper form in denominations of 5,10,50,100 grams of gold or other denominations. The price of gold is taken from the reference rate, as decided, and the Rupee equivalent amount is converted at the RBI Reference rate on issue and redemption. This rate is used for issuance, redemption and LTV purpose and disbursement of loans. Banks/NBFCs/Post Offices/ National Saving Certificate (NSC) agents and others, collect money / redeem bonds on behalf of the government for a fee.
The tenor of the bond is a minimum of 5 to 7 years, to protect investors from medium-term volatility in gold prices. Bonds can be used as collateral for loans. The Loan to Value ratio is to be set equal to ordinary gold loan mandated by the RBI from time to time. Bonds can also be easily sold and traded on exchanges to allow early exits for investors.
The amount received from the bonds will be used by the Government in lieu of government borrowing and the notional interest saved on this amount would be credited in an account "Gold Reserve Fund". Savings in the costs of borrowing compared with the existing rate on government borrowings will be deposited in the Gold Reserve Fund to take care of the risk of increase in gold price that will be borne by the government. Further, the Gold Reserve Fund is continuously monitored for sustainability.
On maturity, the redemption will be in rupee amount only. The rate of interest on the bonds will be calculated on the value of the gold at the time of investment. The principal amount of investment, which is denominated in grams of gold, will be redeemed at the price of gold at that time. If the price of gold has fallen from the time that the investment was made, or for any other reason, the depositor will be given an option to roll over the bond for three or more years. The deposit is not be hedged and all risks associated with gold price and currency will be borne by the Government through the Gold Reserve Fund. The position may be reviewed in case 'Gold Reserve Fund' becomes unsustainable. Upside gains and downside risks are with the investor and the investors will need to be aware of the volatility in gold prices.