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PM Modi Launches 3 Gold Schemes

In a bid to rein in the gold imports and attract investors away from physical assets, PM Modi launches 3 Gold Schemes: 

1. Gold Coin and Bullion scheme
2. Gold Monetisation Scheme
3. Gold Sovereign Bond Scheme

#1. India Gold Coin and Bullion scheme

• The coin will be the first ever national gold coin minted in India and will have the National Emblem of Ashok Chakra engraved on one side and Mahatma Gandhi on the other side.
• Initially, the coins will be available in denominations of 5 and 10 grams.
• The Indian Gold coin is unique in many aspects and will carry advanced anti-counterfeit features and tamper proof packaging that will aid easy recycling.

#2. Gold Monetisation Scheme (GMS), 2015

• Scheme allows you to earn some regular interest on your gold and save you carrying costs as well.
• It replaced the existing Gold Deposit Scheme, 1999.
• It offers option to resident Indians to deposit their precious metal and earn an interest of up to 2.5 per cent.

Who can make deposits?

• Resident Indians (individuals, HUF, trusts, including mutual funds/exchange traded funds registered under Sebi norms) can make deposits under the scheme.
• No maximum limit for deposit under the scheme and the metal will be accepted at the Collection and Purity Testing Centres (CPTC) certified by the Bureau of Indian Standards.

#3. Sovereign Gold Bond Scheme

• Investors can earn an interest rate of 2.75 per cent per annum by buying paper bonds.
• Sovereign Gold Bonds will be issued in multiple tranches subject to the overall borrowing limits.
• The bond would be restricted for sale to resident Indian entities and the maximum allowable limit is 500 grams per person per year.
• They can be used as collateral for loans and can be sold or traded on stock exchanges
  

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Few more things to know

1. Minimum investment in the bond shall be 2 grams.
2. The bonds can be bought by Indian residents or entities and is capped at 500 grams.
3. The RBI has fixed the public issue price of sovereign gold bonds at Rs 2,684 per gram.
4. The borrowing through issuance of Bond will form part of market borrowing programme of Government.
5. The Bonds will be eligible for Statutory Liquidity Ratio (SLR).

Why was there a need for such schemes?

1. To lure tonnes of gold from households into banking system.
2. According to the World Gold Council, an estimated 22,000-23,000 tonnes of gold is lying idle with households and institutions in India.
3. Huge gold imports pushed India’s current account deficit (CAD) to a record $190 billion in 2013, prompting the hike its duty on imports to a record 10 percent.
4. The government wants to reduce the reliance on gold imports over time.

But, will these schemes succeed in bringing down Gold imports?

1. Experts who believe, investors will still find 8 percent offered for bank deposits as more attractive.
2. The present scheme will not bring out even 20 tonnes of gold.
3. Investors fear that the tax department will hound them questioning the source of gold.

Okay! But tell me how good are they from investing point of view?

1. A section of experts feels the interest rates being offered (on both deposits and bonds) are attractive.
2. For people who have gold as an investment asset, it is a good opportunity to gain some interest out of it.
3. Gold is always written off as a zero-yield instrument compared to equities, which give dividend and fixed income which gives fixed interest.

From now on, gold will not only be an instrument of security but will also give earnings and will become part of nation building.

Published with inputs from Arun

What’s New In The Masala Bonds?

During his visit to the UK last week, Prime Minister Narendra Modi spoke about the Indian Railways issuing bonds and listing them on the London Stock Exchange.

Let’s explore the Bonds as a financial instrument and then dive deep into Masala Bonds.

What are Bonds?

Bonds are debt instruments which allow the companies or govt. to raise funds only by incurring debt and lender is guaranteed of a fixed repayment (Principle and Interest).

What are instrument available with Company to raise funds?

1. Issue Bonds – Companies will have to pay the fixed amount when the bond matures.

2. Issue Shares – Companies would like to raise money, but don’t want is as a debt, so company will issue shares.

Can you imagine who (Company/Investor) will prefer what (Debt/Shares)?

Companies will prefer to raise money through equities i.e. issuing shares because they will part a share of the company to the investors, while the investors will prefer to purchase bonds because bonds are more secured.

Shares may give higher returns in the long run. So, it is risk-return trade-off.

How the bonds are more secure than shares?

In case of liquidation of the company, the bond holders are the one who get their claim before the share holders.

Now, let’s get into main discussion on Masala Bonds

What’s new in the Masala Bonds?

Basically, overseas rupee bonds are known as Masala bonds.

• Indian firms have earlier raised money abroad through bonds and other forms of borrowings, but always in foreign currency.
• However, the first overseas rupee bonds were issued in 2013 by the International Finance Corporation, the World Bank’s private sector investment arm.
• To raise funds for capital expenditure, the Indian Railway Finance Corporation will be issuing bonds denominated in rupees.

What are the risk associated Indian companies with foreign currency overseas bond? 

• An Indian company issuing a overseas bond(i.e. in other currencies specially dollar) runs into a risk on account of currency fluctuation.
• If rupee weakens during the period of bond, then it add significantly to costs at the time of repayment, normally at the end of 5 years.

How Masala Bonds will benefit Indian companies?

• If the issuer, issues bonds in rupees, then he gets rid of this risk (currency fluctuation) which passes on to the investor.
• This bond brings a new and diversified set of investors for Indian companies, and more liquidity in foreign exchanges, apart from bank funding and the corporate bond market in India.

Does Masala bond offer something for foreign investors?

The investor who purchases a bond issued by an Indian entity is betting on India, in a hope that currency and inflation would be stable enough to ensure good returns after hedging for foreign exchange risks.

With India’s GDP or national income rising, and projected to grow at a reasonably fast clip over the next few years, many overseas investors would like to buy into such bonds to join the party and to earn higher returns compared to the US and Europe where interest rates are still low.

How does Govt. and RBI view Masala Bonds?

The local currency bond markets can contribute to financial stability by reducing currency mismatches and extending the duration of debt.

It will also be a sign of early acceptance of the Indian currency in trading and settlement overseas, showing the confidence of investors and can lead to  internationalization of the currency over the medium- and long term.

Foreign investors prefer to hedge their risks overseas because there are limited products in the Indian market, especially for longer periods.

The other worry, if the overseas rupee bond market takes off, will be about the growth of the Indian corporate bond market and Indian banks as top companies shift to another market, impacting growth here.

Was such an approach adopted by any emerging economies in past?

China’s People’s Bank of China has previously issued yuan denominated bonds to raise funds at a little over 3%.

China had issued bonds in its own currency in Hong Kong dubbed dimsum bonds and plans to issue more as part of its plan to push its currency for global trade.

1. Unlike China, the Indian govt. has never borrowed abroad on its own, preferring to push its state owned firms, instead.
2. RBI, unlike the Chinese central bank, cannot issue debt with no legal sanction for it.

But these have been borrowings in dollar or other currencies. The Railways bond, on the other hand, will be denominated in rupees.

Published with inputs from Pushpendra

How is ease of doing business linked with the Insolvency and Bankruptcy Code?

In India, lack of resolution of insolvency is one of the significant factors for the failure of credit market in the country. The present legislations governing insolvency are fragmented, multi-layered and the adjudication of insolvency matters take place in multiple forum, resulting in an unpredictable regime.

The Insolvency and Bankruptcy Code has been hailed as an excellent reform for India that will pay a critical role in improving the ease of doing business.

Why does India need a Bankruptcy law?

Currently it takes, on an average, more than 4 years to resolve insolvency in India. The proposed Bankruptcy Code will replace over a century-old archaic insolvency act – The Presidency Towns Insolvency Act, 1909.

• Delays in making decisions on the viability of business.
• Sometimes, company promoters try to delay reorganisation or attempts to sell-off assets or change of management.
• Delays in disposing off cases by Debt Recovery Tribunal.
• Continued litigation at various levels and delays in appellate level.
• Currently, there are 4 different agencies viz. the HC, the Company Law Board, the BIFR and the DRTs that handle insolvency-related cases.

How can a modern law help?

• Speedy closure will help firms on the verge of brink in two ways, i.e. either restructure the firm or sell-off the assets to recover the money.
• It will promote efficient allocation and greater availability of credits for businesses, as it frees up capital.
• Development of financial markets such as bond market, due to clarity on repayment for debtors.

What is the international experience in this regard?

• US Bankruptcy Code provides for fairly quick liquidation or reorganisation of the company.
• In UK, once the cases are filed, then after 12 months, either the part of assets are discharged to pay-off debt or court-appointed administrators handle the case, if company can be turned around.

Was any committee formed to suggest Insolvency reforms?

• The Bankruptcy Law Reform Committee (BLRC) was set up in August, 2014 under the chairmanship of Mr. T.K. Vishwanathan.
• It was the first committee with the mandate of suggesting comprehensive and not incremental reforms.
• The BLRC extensively studied the insolvency regime within India as well as various international jurisdictions.

What was the recommendation of the Committee?

• The committee proposed an all-encompassing law for corporate and individual insolvency, reflecting the best practices from across the globe.
• The corporates should assess the viability of an enterprise in the early stages of insolvency, such that the creditor and the debtors can negotiate a financial arrangement while preserving the economic value of the enterprise.
• However, if the negotiations fail, then the enterprise is liquidated. The insolvency resolution is required to be done within a period of 180 days.
• It also suggested fast track insolvency resolution for certain entities which is required to be completed within 90 days.

What are the provisions of draft Insolvency and Bankruptcy Code?

The code aims to bring modern framework to deal with bankruptcy and insolvency of variety of economic players, including individuals, but excluding financial firms.

• It will restore some power to creditors, both financial and operational.
• It will fast-track mechanism of insolvency resolution process may be applicable to certain categories of entities.
• The corporate insolvency would have to be resolved within a period 180 days, extendable by 90 days.
• It also provides for fast-track resolution of corporate insolvency within 90 days.
• Debt Recovery Tribunals will be adjudicating authority over both individual & unlimited liability partnership firms.
• National Company Law Tribunal will be adjudicating authority with jurisdiction over companies with limited liability.
• It has a clause to provide for insolvency professionals who will specialize in helping sick companies. <These professionals will help revive control the management of distressed firm to revive it>
• It also provides for information utilities that will collate all information about debtors to prevent serial defaulters from misusing the system
• To setup Insolvency and Bankruptcy Board of India to act as a regulator for these utilities and professionals.
• The bill also seeks to establish Insolvency and Bankruptcy Fund of India.

What about Financial Sector Insolvencies?

• FSLRC recommended creation of a resolution corporation to monitor financial firms and intervene before they go bust.
• The aim is to close-down the firms which can’t be revived or change their management to protect investors or depositors.

The reform is dubbed as 2nd most important reform after GST, as it will also improve the ease of doing business in India.

Published with inputs from Pushpendra