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Tuesday, July 22, 2014

Govt steps in to regulate Gold Scheme of Jewellers - who will benefit ??

There are various tests to find out resistance – just do a shopping in T Nagar area – resist not to get into any Jewellery shop – and try resisting not getting into any of their offers or schemes. In the olden days when you did not have so much of TV channels and spare time, magazines provided the best entertainment…… and the butt of many jokes was ‘borrowing’ – not of money but of jewels and apparels for attending functions……  perhaps those days are gone by  and people have stopped borrowing / lending or perhaps it is no longer one worthy of a joke. !!

Gold traditionally viewed as a safe-haven investment in times of economic uncertainty and geopolitical tension. It is also used as a hedge against rising inflation and depreciation in the value of paper currencies. Gold has been money for many reasons – it can be traded easily; it always has a high value to weight ratio; can be divided into smaller units without destroying; tougher to have counterfeits and the scarcity of gold has only been going up. 

More than all this, Gold has always been used as a symbol of  status and power.

It is another matter altogether that it is one item (is there anything else in the same bracket) – where one never gets full value of what one pays for ……. Think of any bulk commodity – you end up paying for the quantity received but here the hapless consumer ends up paying for that ‘wastage loss’ – the quantity reportedly lost during the process of manufacturing. Wastage charges are expressed as % of weight of gold ornament ~ and some are apprehensive that consumers end up paying more than the actual quality that they get.  

In all melee, the middle class mentality, is to buy Gold in small grams and keep augmenting their kitty for future – for marriage of their daughters and the like – over the years, every shop worth its name have evolved some schemes to entrap buyers – fabulous ‘gold saving schemes’ – which promise gold tomorrow at today’s rate.  In most schemes, the buyers are required to deposit fixed amount every month (monthly instalments)  - at the end of fixed tenure, the customer gets gold worth full value of the scheme which may have some bonus amount too.  There are some schemes where they convert the monthly instalments into grams of gold at prevalent rates ….. some offer gold at lowest rate of that month and so on.  That catch here is –you are offered only Gold jewellery (ornaments – bangles, chains and the like) and not Gold coins / bars …..

More than you gaining – the first obvious advantage for the seller is – you are committed to buying only from that jeweller and only gold ornaments at that ….  Some Financial analysts point out that the traders provide marginally a higher % of returns close to 18% as against the rate around 9% that you would get on a Fixed Deposit. 

While one may have to rethink on whether it is wiser investing and getting fixed to a particular trader for a marginally higher rate – here comes another missive from the Govt. …… The Jewellers will not be in a position to offer even what they have been offering – for the simple reason that these schemes have been brought under the definition of deposits under the Companies Act. So, the effective return cannot be more than 12 per cent and the total amount of deposits has to be within 25 per cent of the company's (other than banks and non-banking finance companies) net worth. That would mean a loss of say 6 – 7 % for the investors.  Earlier, money put in these schemes were seen as advances for future purchase. "The tenure for these schemes will have to be restricted to a year. Currently, the tenure ranges from one to three years." The new rule in the interest of investor protection, also prescribes that jewellers will be able to take only as many deposits as they can repay. Of course unrecognized, petty players would not come under the net. 

Some jewellers reportedly  are closing their schemes informing their customers that they can chose to buy jewellery of the savings done thus far or take back the value.  So far, there was no hedge against Jeweller defaulting payment, now reportedly the laws are harsher – that the person running the scheme can be  jailed. According to jewellers, the new Companies (Acceptance of Deposit) Rules, 2014, limits the interest rate that companies can offer depositors to 12.5 per cent, and caps the total deposits collected to within 25 per cent of their net worth.

Is it good for the customer or for the Jeweller or benefits none – time will tell.

With regards – S. Sampathkumar

22nd July 2014.

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