05 Mar 2016

RETAIL RESEARCH
Sovereign Gold Bonds (SGBs) 2016 Tranche III Issue
Prologue: The Government of India has come out with its third tranche of sovereign gold bond scheme called Sovereign Gold
Bonds 2016. The applications for the bond will be accepted from March 08, 2016 to March 14, 2016. The Government of India
may, with prior notice, close the Scheme before the specified period. The Bonds will be issued on March 29, 2016.
The issue price of the Sovereign Gold Bond for this third tranche has been fixed at Rs. 2,916 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 (February 29, 2016 to March 4,
2016) published by the India Bullion and Jewellers Association Ltd. (IBJA).
Previous Issue: It is worth noting that 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.
Key benefits:
Sovereign Gold Bond delivers two streams of returns. One in the form of regular interest 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. The loan-to-value (LTV) ratio is set equal to ordinary gold loan mandated by the Reserve
Bank of India. It means that this bond is as liquid as physical gold and could be exchanged for money, albeit on loan basis, at the
time of financial need.
Basic Details:
The RBI issues these Sovereign Gold Bonds on behalf of Indian Government with the main objective to reduce the demand for
physical gold. They are issued as certificates (Form C) indicating that investors bought the stated quantum (in grams) of gold. The
value of the bond will be linked to the price of gold. Bonds will be sold through banks, SCHIL and designated Post Offices, as may
be notified, either directly or through agents.
Interest Rate: The Sovereign Gold Bonds offer investors an interest rate of 2.75% per annum payable semi-annually. Interest will
be credited semi-annually to the bank account of the investor and the last interest will be payable on maturity along with the
principal.
Minimum application criteria: The Bonds are denominated in multiples of gram(s) of gold with a basic unit of 1 gram. The
Minimum permissible investment will be 2 units (i.e. 2 grams of gold).
Maximum application limit: The maximum amount subscribed by an entity will not be more than 500 grams per person per fiscal
year (April-March). A self-declaration to this effect will be obtained.
Tenor: The tenor of the Bond will be for a period of 8 years (from Mar 29, 2016) with exit option permitted from 5th year of the
date of issue on interest payment dates.
Who are eligible to invest: The Bonds will be restricted for sale to resident Indian entities including individuals, trusts,
Universities and charitable institutions.

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Joint holding is allowed on Sovereign Gold Bonds. Further, the minors are also allowed to invest in these bonds. However, the
application on behalf of the minor has to be made by his / her guardian. In case of joint holding, the investment limit of 500
grams will be applied to the first applicant only.
Payment option: Payment shall be accepted in Indian Rupees through Cash upto a maximum of Rs.20,000/- or Demand Drafts or
Cheque or Electronic banking. Where payment is made through cheque or demand draft, the same shall be drawn in favour of
receiving office.
Redemption: The Bonds shall be repayable on the expiration of eight years from March 29, 2016. Pre-mature redemption of the
Bond is allowed from 5th year of the date of issue on interest payment dates.
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: In case of 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. The proceeds will be
credited to the customers bank account provided at the time of applying for the bond.
Certificate: The Bonds shall be issued in the form of Government of India Stock in accordance with section 3 of the Government
Securities Act, 2006. The investors will be issued a Holding Certificate (Form C). The Bonds shall be eligible for conversion into demat form.
Nomination: Nomination and its cancellation shall be made in Form D and Form E, respectively, in accordance with the
provisions of the Government Securities Act, 2006 (38 of 2006) and the Government Securities Regulations, 2007, published in
part III, Section 4 of the Gazette of India dated December 1, 2007.
Loan against Bonds: The Bonds may be used as collateral for loans. The Loan to Value ratio will be as applicable to ordinary gold
loan mandated by the RBI from time to time. The lien on the Bonds shall be marked in the depository by the authorized banks.
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). 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.
Transferability: The Bonds shall be transferable by execution of an Instrument of transfer as in Form F, in accordance with the
provisions of the Government Securities Act, 2006 (38 of 2006) and the Government Securities Regulations, 2007, published in
part III, Section 4 of the Gazette of India dated December 1, 2007.
The Bonds shall be eligible for trading from such date as may be notified by the Reserve Bank of India.
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.

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Comparison between Sovereign Gold Bonds and Gold ETF:
Sovereign Gold Bonds score over Gold ETF on many grounds. First of all, 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.
Secondly, the Sovereign Gold Bonds hold Sovereign guarantee hence there is no default risk is involved. The credit risk in Gold ETF
is also very minimal.
Thirdly, 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.
It is worth noting that buying/selling ETFs attract broker commission while transacting while in SGB the RBI will pay 1%
commission to distributors.
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

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HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042
Phone: (022) 3075 3400 Fax: (022) 2496 5066 Website: www.hdfcsec.com Email: hdfcsecretailresearch@hdfcsec.com
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. HDFC Securities Ltd. is a
SEBI Registered Research Analyst having registration no. INH000002475."
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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