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SGB

31 AUGUST 2016

Sovereign Gold Bond 2016-17 Series II (Tranche 5)

Prologue:
The Government of India has come out with its fifth tranche of sovereign gold bond scheme called Sovereign Gold Bonds 2016 -17 Series II. The
applications for the bond will be accepted from September 01, 2016 to September 09, 2016. The Government of India may, with prior notice, close the
Scheme before the specified period. The Bonds may be issued on September 23, 2016.
The issue price of the Sovereign Gold Bond for this fifth tranche has been fixed at Rs. 3,150 (Rupees Three Thousand One Hundred Fifty only) per gram of gold.
The rate has been fixed on the basis of simple average of closing price for gold of 999 purity of the previous week (August 22-26, 2016) published by the India
Bullion and Jewellers Association Ltd (IBJA).
Previous Issues:
The Honorable Finance Minister had announced in Union Budget 2015-16 about developing a financial asset, Sovereign Gold Bond, as an alternative to
purchasing metal gold.
Accordingly, the first tranche was open for subscription from November 05 to November 20, 2015. The scheme met with good response from investors. About
62,169 applications were received and Rs. 246 crore was collected (915.953 kg of gold). The issue price of the sovereign gold bond for the first tranche was
fixed at Rs. 2,684 per gram of gold.
The second tranche which was open for subscription from January 18, 2016 to January 22, 2016 had attracted 330,000 applicants, for 3,071 kg of gold worth
Rs 798 crore, a rise of 200 per cent over the first tranche in November. The issue price of the sovereign gold bond for the second tranche was fixed at Rs. 2,600
per gram of gold.
The subscription at the third tranche opened between 8 March and 14 March which attracted 64,000 applications and received for 1,128 kg of gold of value
Rs. 329 crore. The price for the third tranche was set at Rs. 2,916 per gram.
In the fourth tranche issued during July 2016, the Government has collected Rs 919 crore, the highest subscription among the tranches so far, mobilised
th
through over 1.95 lakh applications, representing around 2.95 tonnes of gold. The issue price for the 4 tranche was fixed at Rs 3,119 for per gram.
The overall collection in four tranches was Rs. 2,292 crore representing 8,064 kg of gold.
Listing of SGB:
As mentioned, the first three tranches of gold bonds were listed on bourses of which the first tranche units started trading from 13th June 2016 onwards while
th
the second and third tranches got listed and traded on 29 August 2016 onwards. Seeing the below details, the tranche 1 issue traded with notable premium
in BSE and NSE with the daily average traded volume of 199 and 152 units. In the span of 9 months period, the tranche 1 SGB bonds have yielded returns close
to 20%.
Issue

1st Tranche

Issued date
26-Nov-15
Issue price (Rs)
2,684
Total no of applications received
62,169
Collected Amount (Rs Crs)
246
Worth of gold (in Kg)
916
Interest Payment Date
30 May & 30 Nov
Daily Average traded volume on NSE since listed (Nos)
152
Daily Average traded volume on BSE since listed (Nos)
199
BSE Price as on 30 Aug 2016
3,213
NSE Price as on 30 Aug 2016
3,225
Returns as on 30 Aug 2016 (BSE Price) since issued
20%
Returns as on 30 Aug 2016 (NSE Price) since issued
20%
* Not yet listed - IBJA Gold Rate (999 Purity) for per gram (Rs) as on 30-Aug-2016.

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2nd Tranche

3rd Tranche

4th Tranche

08-Feb-16
2,600
3,30,000
798
3,071
8 Feb & 8 Aug
81
113
3,085
3,133
19%
20%

29-Mar-16
2,916
64,000
329
1,128
29 Mar & 29 Sep
23
57
3,110
3,167
7%
9%

Jul-16
3,119
1,95,000
919
2,950
NA
NA
NA
3,126*
0.2%

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Trading Details of the SGB Tranche 1 bonds on BSE and NSE since listed:

Key benefits:

Investors get returns that are linked to gold price by holding Sovereign Gold Bonds.
Sovereign Gold Bonds deliver two streams of returns. One in the form of regular interest of (2.75% p.a) on invested capital every six months and the
other in the form of capital gains at the time of redemption.
SGBs can be used as collateral for loans. This bond is as liquid as physical gold and could be exchanged for money, albeit on loan basis, at the time of
financial need.
The bonds will be available both in demat and paper form.
In Union budget 2016, Finance Minister has proposed exempting such bonds from capital gains tax on redemption (under normal case, LTCG tax is
levied 20% with indexation on gain).
High Liquidity: Investors can liquidate these bonds from the secondary market such as BSE and NSE.

Basic Details:

Interest Rate: The Sovereign Gold Bonds offer an interest rate of 2.75% per annum payable semi-annually. Interest will be credited semi-annually to
the bank account of the investor.
The Bonds will be restricted for sale to resident Indian entities including Individuals, HUFs, Trusts, Universities and Charitable Institutions.
Minimum application criteria: 1 unit (i.e. 1 gram of gold).
Maximum application limit: Not be more than 500 grams per person per fiscal year (April-March).
Tenor: The tenor of the Bond will be for a period of 8 years with exit option permitted from 5th year of the date of issue on interest payment dates.
Redemption: The Bonds are repayable on the expiration of eight years. Pre-mature redemption of the Bond is allowed from 5th year of the date of
issue on interest payment dates.
Redemption price: The sovereign gold bonds will be redeemed for cash at the end of the investment tenure. Redemption will take place at the
prevailing gold price (based on previous weeks (Monday-Friday) simple average of closing price of gold of 999 purity published by IBJA.), giving the
investor the value of the bond plus capital appreciation/depreciation from increase/fall in gold price.
Premature redemption: After 5 years, investors can approach the concerned bank/Post Office/agent thirty days before the coupon payment date.
Request for premature redemption can only be entertained if the investor approaches the concerned bank/post office at least one day before the
coupon payment date.
Liquidity: Liquidity is available from secondary markets as these bonds are mandated to be listed on BSE and NSE. It took close to 6 months to be
listed the first tranche in the exchanges.
Nomination facility: Yes.
Loan against Bonds: Available.
Taxation: Interest on the Bonds shall be taxable as per the provisions of the Income-tax Act, 1961. Capital gains tax treatment will be the same as
that for physical gold (20% tax after indexation benefit if held for three years) (Explained below). TDS is not applicable on the bond
interest/redemption proceeds.
The Union Budget for FY17 has proposed that redemption of these sovereign gold bonds by an individual will be exempt from capital gains tax. And,
that long-term capital gains to any person on transfer of sovereign gold bonds shall be eligible for indexation benefits.

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What are the benefits of buying these bonds in comparison to physical gold?

Here, investors buy gold in paper; hence there is no need of checking the quality of gold as that is a major hurdle when purchasing gold from
jewellers.
Further no storage/locker/insurance charges are payable in case of SGB.
Apart from this, the investor has to face counterparty risk while selling their physical holding of the yellow metal which is not the case here.

Comparison between Sovereign Gold Bonds and Gold ETF:

Sovereign Gold Bonds score over Gold ETF on many grounds.

The Sovereign Gold Bonds pay an interest of 2.75% per annum (though taxable), an added benefit to the investors which is not available with Gold
ETF. However, both options are providing capital appreciation/depreciation.
Sovereign Gold Bonds hold Sovereign guarantee hence there is no default risk is involved. The credit risk in Gold ETF is also very minimal.
Investors have to bear the transaction charges if they want to trade in Gold ETF while there is no such charge involved with Sovereign Gold Bonds if
they dont exit through the exchanges.
Further, Gold ETF deduct some charges in the name of TER (Total Expenses Ratio) from the total assets. This expense ratio ranges from 0.99% - 1.2%
per annum of the total assets.
On the liquidity front, the Gold ETF score over Sovereign Gold Bonds. Investors can enter/exit from Gold ETF during any working day of the stock
exchanges. Liquidity will not be the constraint (though impact cost may be a hurdle) for the Gold ETF. On the other hand, the
encashment/redemption of the Sovereign Gold bond is allowed after fifth year from the date of issue on coupon payment dates. However, these
bonds will be tradable on Exchanges, if held in demat form (but, liquidity may be limited).
No capital gains tax is payable (as per the latest proposal in FY17 budget) if the sovereign gold bonds are held till maturity, while ETFs held for more
than three years attract capital gains tax (with indexation benefits).

Comparison among Sovereign Gold Bonds, Physical Gold and Gold ETF:
Particular
Sovereign guarantee
Interest on the investment
Capital Appreciation/depreciation
Annual fund management fees
Brokers charge on buying
Exit / redemption option
Tradability
Liquidity
Storage/Insurance charges
Quality check required

Sovereign Gold Bonds

Physical Gold

Gold ETF

Yes
Yes
Yes
No
No
Only from 5th year
Yes
Limited
No
No

NA
No
Yes
No
No
Any time exit
Yes
Highly liquid
Yes
Yes

No
No (No dividend option provided on Gold ETF)
Yes
Yes
Yes
Any time exit
Yes
Highly liquid
No
No

Is capital gain tax payable on gains in SGB?

In case the SGBs are encashed by way of redemption by an individual on expiry of 8 years or earlier from the RBI, no capital gains tax is payable.
In case the SGBs are sold before the maturity date on the exchanges, then this exemption is not applicable. In such a case, the Capital Gains will be levied
(Long term or Short term based on whether it is held for 3 years or more or less than 3 Years) at the applicable rates i.e. short term (at applicable rates to the
investor) and long term (20% after indexation). In such a case, an investor can claim that the period of holding for being taxed as Long term capital gain should
be reduced to 12 months (as SGB is a listed security- Refer Sec 2(42A) of Income Tax Act, 1961). However unless a clarificatory circular is issued, this stand may
be prone to litigation.
Present scenario in Gold:
The recent development in the global arena has been positive for the prices of the gold. Year to date, the prices of gold in USD term rose by 23.8% while in INR
term it rose by 25.7%. The yellow metal has soared in value since Britain voted to leave the European Union as investors rushed towards traditional "safe
haven" assets. Gold prices have reached a three-year high as Brexit worries intensify.
However, the recent periods seen the prices of the gold tumbling on the expectation that the US fed would increase the rate. US consumer confidence rose to
an 11-month high in August, with households more upbeat about the labour market, in a further sign that the economy was regaining steam after faltering in
the first half of the year. Gold is highly sensitive to rising US interest rates which increase the opportunity cost of holding non-yielding bullion while boosting
the dollar in which it is priced.

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However, below points would strengthen the positive outlook on gold.
Institutions, Investment Banks and market veterans like, World Gold Council, JP Morgan, George Soros, Stanley Druckenmiller (legendary hedge fund
manager), Paul Singer (hedge fund billionaire of Elliott Management), Pierre Lassonde (legendary gold investor) have recently forecasted better times for gold
targeting the prices of the gold to rise to between $1400 to $1800 an ounce over a few quarters.
The rationale for these people becoming bullish on gold include:

Market uncertainty and expansionary monetary policies will continue to support both investment and central-bank demand for gold.
Concerns over negative interest rate policies pursued by central banks in Europe and Japan - such policies reduce the opportunity cost in holding
gold. This makes holding gold attractive even though it offers no income.
Demand for gold typically climbs when interest rates are low. Although gold has no yield, it tends to offer investors a better place to park their
money when returns from bonds and cash savings are poor - as they are when rates are low.
Gold is a hedge against volatility, making the metal attractive as a continued safe-haven trade.
Central banks may consider diversifying their reserves [as they anticipate] negative rates on existing holdings.
Gold is a great portfolio hedge in an environment where the world government bonds are yielding at historically low levels.
Risk of collapse of large global banks and geo political risks.
It is widely expected that gold mine supply has peaked in 2016, and it is likely that mine supply will be entering a period of decline in 2017 and 2018.
Expectations that that the current stock market recovery in the U.S. may be nearing its peak (the current recovery has lasted 86 months compared to
the average bull market length of 51 months).
Central banks will have less ability to fight the next slowdown.
Gold as the asset class to own in these experimental times in which the "bull market in stocks seems exhausted.
Investors have increasingly started processing the fact that the worlds central bankers are completely focused on debasing their currencies.
With a change in US presidency now a very real threat to global financial stability, and with monetary stimulus effectiveness waning tremendously,
now may be the time to buy gold.
The dollar is gold's big rival and the two tend to have an inverse relationship - when demand for dollars falls, investors and banks around the world
park their money in gold, thereby increasing the value of the yellow metal.
Fears of a collapse in the Eurozone have never quite gone away, even after Greece brokered a deal on its debt in May. The impact of Brexit on the
wider European economy is yet to be quantified.
The upcoming festive and wedding season in India would also push up the demand for gold in the domestic arena.

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Disclaimer: Gold investments are subject to risk. Past performance is no guarantee for future performance. This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient
and not for circulation. This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained
herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities
referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for non-Institutional Clients.
This report has been prepared by the Retail Research team of HDFC Securities Ltd. The views, opinions, estimates, ratings, target price, entry prices and/or other parameters mentioned in this document may or may
not match or may be contrary with those of the other Research teams (Institutional, PCG) of HDFC Securities Ltd.

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