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Sovereign Gold Bonds vs Gold Monetization Scheme

You might have heard of Sovereign Gold Bonds (SGB) and Gold Monetisation Scheme (GMS). But what is the difference between the two?

 

 Sovereign Gold Bonds (SGBs) Gold Monetisation Scheme (GMS)
Meaning SGBs are issued by Reserve Bank of India (RBI) on behalf of the Government of India. They are issued as Government of India Stock in accordance with Section 3 of Government Securities Act, 2006. GMS was introduced by modifying the existing ‘Gold Deposit Scheme (GDS)’ and ‘Gold Metal Loan Scheme (GML)’.
GMS provides an opportunity to the eligible customers to deposit their gold with the designated banks and earn interest on such deposits.
Sellers / providers Sold through ‘Receiving Offices’ such as Scheduled Commercial banks (except Small Finance Banks and Payment Banks), Stock Holding Corporation of India Limited (SHCIL), Clearing Corporation of India Limited (CCIL), designated post offices, and recognised stock exchanges viz., National Stock Exchange of India Limited (NSE) and Bombay Stock Exchange Limited (BSE). All Scheduled Commercial Banks excluding RRBs are eligible to implement the Scheme.

 
Investors / depositors Eligible investors include individuals (including minors), HUFs, trusts, universities and charitable institutions. Resident Indians such as Individuals, HUFs, Proprietorship & Partnership firms, Trusts including Mutual Funds / Exchange Traded Funds, Companies, charitable institutions, Central Government, State Government or any other entity owned by Central / State Government, are eligible to make a deposit either singly or jointly with other eligible depositors.
Quantity

 

 Minimum investment – 1 gram.
Maximum limit – 4 Kg for individual, 4 Kg for HUF and 20 Kg for trusts and similar entities per financial year (April-March).
Annual ceiling includes SGBs subscribed under different tranches during initial issuance by Government and those purchased from Secondary Market (for eg. through stock exchanges).
In case of joint holding, the investment limit of 4 Kg applies to the first applicant only. 		Minimum deposit at any one time – 10 grams of raw gold (bars, coins, jewellery excluding stones and other metals).
No maximum limit for deposit.
Tenor 8 years

 

 Short Term Bank Deposit (STBD) – 1-3 years (with a facility of roll over).
Medium Term Government Deposit (MTGD) – 5-7 years
Long Term Government Deposit (LTGD) – 12-15 years
Allowed for broken periods (e.g. 2 years 4 months; 13 years 4 months 15 days; etc.).
Lock-in period Exit option after 5th year on the next interest payment date. STBD – determined by designated banks.
MTGD – 3 years
LTGD – 5 years
Liability Issued by RBI on behalf of the Central Government. STBD – treated as liability on the bank’s balance sheet.
MTGD & LTGD – accepted by the designated banks on behalf of the Central Government, hence, not reflected in the balance sheet of the designated banks.
Price / amount Price of SGB is fixed in Indian Rupees on the basis of simple average of closing price of gold of 999 purity, published by the India Bullion and Jewellers Association (IBJA) Limited for the last 3 working days of the week preceding the subscription period.
The issue price of SGBs is less by ₹50 per gram for those investors applying online and making payment through digital mode. 		The amount of deposit is equivalent to the value of 995 fineness gold in Indian Rupees at the time of deposit.
Interest rates 2.50% p.a. STBD – decided by designated banks.
MTGD & LTGD – decided by Central Government and notified by RBI. The current rates are –
MTGD – 2.25% p.a.
LTGD – 2.50% p.a.
Interest calculation On the nominal value (amount of initial investment). With reference to the value of gold in Indian Rupees at the time of deposit.
Interest denominated and paid in Indian Rupee only Indian Rupee only
Periodicity of interest payment Payable semi-annually STBD – on respective due dates and withdrawable periodically / at maturity.
MTGD & LTGD – Annual and paid on 31st March every year. Depositor has an option to receive payment of simple interest annually or cumulative interest (compounded annually) at the time of maturity.
Principal denominated in Gold Gold
Redemption of principal at maturity Redemption price is fixed in Indian Rupees based on simple average of closing price of gold of 999 purity, of previous 3 working days published by IBJA Ltd. At the option of the depositor, can be either in Indian Rupee equivalent of the value of deposited gold at the time of redemption, or in gold.
In case of MTGD & LTGD, if the redemption of the deposit is in gold, an administrative charge at 0.5% of notional redemption amount in terms of Indian Rupee is collected from the depositor.
Pre-mature withdrawal Redeemed in Indian Rupees only. STBD – designated banks may, at their discretion, allow whole / part premature withdrawal of the deposit subject to minimum lock-in period and penalties determined by them, redeemable in Indian Rupee equivalent or gold at the discretion of the designated banks.
MTGD & LTGD – pre-mature redemption in Indian Rupee only.
Trading

 

 Can be traded in the secondary market through stock exchanges. Cannot be traded.
Commission to banks / institutions Commission for distribution of SGBs is paid at 1% of the total subscription received by the receiving offices and receiving offices are required to share at least 50% of the commission so received with the agents / sub agents for the business procured through them. MTGD & LTGD – designated banks are paid handling charges (including gold purity testing, refining, transportation, storage and any other relevant costs) for new deposits at 1.5% and commission for new and renewed deposits at 1% of the rupee equivalent of the amount of gold mobilized for MLTGD.
Loans Can be used as collateral for loans. Loan to Value (LTV) ratio is same as applicable to any ordinary gold loan. Rupee loans can be availed against the collateral of deposits.

References

Reserve Bank of India. (2015, October 22). 'Gold Monetization Scheme, 2015 (Updated as on August 04, 2022)'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10084&

Reserve Bank of India. (2021, October 21). 'Sovereign Gold Bond Scheme 2021-22'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=52440

Reserve Bank of India. (2021, October 22). 'Sovereign Gold Bond Scheme of the Government of India (GoI) - Procedural Guidelines - Consolidated'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12181&Mode=0

Reserve Bank of India. (2022, March 29). 'FAQ-Gold Monetisation Scheme, 2015'. Retrieved from https://rbi.org.in/Scripts/FAQView.aspx?Id=110


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