Protecting Small Gold Investments

Why in news?

One of the leading Jewelries in Chennai has officially declared a financial crunch and has sought more time to honour its gold schemes.
This highlights that small savers need a safer alternative to the unregulated gold savings schemes.

What is the present scenario?

A large part of population in India considers gold as a viable saving option.
Instruments such as Gold Exchange Traded Funds (ETFs) or Sovereign Gold Bonds (SGBs) have failed to attracted savers.
Gold ETFs require the investor to own a demat account and be familiar with the workings of the stock market.
SGBs also has long lock-in of 5-8 years.
So these instruments are used mainly by informed investors.
Instead, the unregulated Golden Deposit schemes offered by jewellers thrives, especially in the southern states.

What is the design of the scheme?

Every month, the customer deposits a fixed instalment as small as 500 with the jeweller.
After a stipulated time, deposits can be swapped for an equivalent value of gold jewellery, or roll it over for another year.
There is no interest offered on these deposits.
Customers are rather lured by freebies and discounts.
These schemes are usually not registered, yet they are widely mistaken as ‘gold deposits’ or ‘gold chits’ with government backing.

What are the problems with the scheme?

The unregulated nature of these schemes allows them to raise remarkable amounts without sticking to any end-use criteria.
This makes them highly vulnerable to the fluctuations.
Even jewellers with genuine intentions may be forced to default on payments during situations of customer panic.
This is direct fallout of the non-maintenance of buffer funds which becomes mandatory in recognised financial instruments.
Notably, jewelleries defaulting are also quite frequent which are then struck up in litigations and investigations.
These schemes have proliferated mainly because they help in accumulating unaffordable gold through small investments.

What is the existing regulating framework?

Section 45S of the RBI Act expressly bars unincorporated entities from accepting public deposits.
Companies accepting such deposits are required to register themselves as NBFCs with the RBI.
Post Saradha Scam, SEBI won exceptional powers to regulate Collective Investment Schemes that pool above Rs.100 crore.
It has also issued multiple orders against Ponzi schemes promising astronomical returns from various investments.
But gold savings schemes are out of the regulatory ambit of Ministry of corporate affairs, SEBI & RBI owing to technicalities.

How are regulations being circumvented?

Either most schemes keeps less than 100 crore or aren’t being reported to SEBI.
Companies Act of 2013 tightened regulations and caped deposits at 25% of the company’s networth and incorporated many other restrictions.
But only large jewellers have reduced their saving schemes.
So unregulated gold savings schemes continue to flourish.

What can be done?

Strictening regulations on jellwer sponsored saving scheme is obviously necessary.
Reworking the government’s SGB scheme to make it simpler and allow savers to invest in instalments can be considered.

Source: Businessline