What you need to know about the listing of Gold Bonds…

The gold bonds issued by the government of India in 3 tranches till date, are likely to be listed on the BSE. The Gold Bond Scheme was envisaged to encourage people to hold gold in security form rather than as physical gold. Holding gold in physical form entails cost of storage, insurance and transportation. These problems can be overcome by holding gold through the Gold Bonds Scheme and holding in demat format.

Why has the issue of listing of gold bonds come up?

The government had issued 3 tranches of Gold Bonds in November, January and in March respectively. At the time of the issue of gold bonds, the commitment was that these gold bonds would be listed after 6 months from the date of the issue. From that perspective only the November tranche of the Gold bonds will qualify for listing now as the other two tranches are yet to complete 6 months. It needs to be remembered that the first tranche of the Gold Bonds only managed to collect the equivalent of 917 Kg of gold as the price of the gold bond was set higher than the spot price of gold. The government, as per its commitment, plans to list the first tranche of gold bonds on the BSE for trading in the secondary market.

Will the Gold Bonds list at a premium?

They certainly will list at a premium. Remember, the first tranche issued in November was done at a price of Rs.2682/gram. The Indian Bullion and Jewellers Association (IBJA) has estimated the current price of the gold bond to be in the range of Rs.3000-3050 / gm. That would mean that most investors in the first tranche will benefit from the premium listing of the bond. Of course, as in the case of closed ended funds, there will be an illiquidity discount on the market price, but it will still command a substantial premium to its issue price in November.

What investors and traders need to know about listing of gold bonds?

Apart from the fact that gold bonds will be listed in the secondary markets for trading after 6 months from the issue date, there are other things that investors and traders need to know about the listing of gold bonds. Firstly, the limit of 500 gm per individual will continue to apply irrespective of whether you buy these gold bonds in the IPO or from the secondary market. That is the overall limit per individual. Secondly, only dematerialized bonds will be permitted for trading initially. Physical gold bonds will have to be dematerialized before they can be traded on the exchanges. Thirdly, when you apply for the Gold Bond IPO, you will not be subject to payment of stamp duty but when you transact these gold bonds in the secondary market, they will be subject to stamp duty at the prescribed rates in the respective states. Last, but not the least, it needs to be remembered that the definition of long term capital gains in case of gold bonds is beyond 3 years. Hence any trading profits in gold bonds within the 3-year time frame will entail short term capital gains at the peak rate.

Listing may not add immediate value, but it gives comfort to investors…

Due to the presence of stamp duty and short term capital gains, the secondary market trading in gold bonds may not really pick up immediately in a big way. There are a few key points that the government will have to address to make listing of gold bonds more productive…

  • The government should explore the idea of appointing market makers who can give two-way quotes and provide liquidity in gold bonds.
  • The investors also need clarity on how interest will be paid on the bonds and how the accrued interest will get built into the price of the gold bond.
  • Illiquid secondary markets will result in the market price of the gold bond quoting at a huge discount to the spot price of gold, defeating the entire purpose of secondary market listing of gold bonds.
  • Government should explore giving preferential treatment for demat gold in terms of taxation and definition of capital gains so that the shift from physical gold to demat gold can be managed more effectively. A stamp duty exemption on gold bonds trading will also go a long way in positioning demat gold more favourably with respect to physical gold.

While there are early days to comment on the long term potential of secondary market listing of gold bonds, it will give a greater degree of confidence to the IPO investors. To begin with, this can be instrumental in attracting investors towards demat gold as an investment option. That may be the immediate benefit of listing gold bonds in the secondary market.

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