% Gold Bond Sovereign gold bonds are papers or certificates issued by the Government of India indicating that investors bought the stated quantum (in grams) of gold. The value of the bond will be linked to gold prices. The objective of the scheme is to provide an alternative to buying physical gold Attractive option to invest in gold... February 24, 2017 Sovereign Gold Bonds The Government of India, in consultation with the Reserve Bank of India, has come out with Sovereign Gold Bond Scheme 2016-17 Series IV. The subscription will be open from February 27, 2017 to March 03, 2017 and bonds will be issued on March 17, 2017. The issue price of these bonds has been fixed at 2893 per gram, against the current price of 2946 as on February 23, 2017. Investors will get additional interest at the rate of 2.50% per annum on the initial deposited amount. Investors will continue to have full exposure to gold prices to the extent of amount deposited. The sovereign gold bonds issued by the Government of India offer the a good option to take exposure to gold as it offers additional interest of 2.50% per annum apart from full gold price exposure Overall asset allocation should remain the deciding factor to determine the amount of exposure to gold bonds After having delivered negative returns in 2013, 2014 and 2015, gold prices have bounced back sharply gaining 11% in 2016 Research Analyst Sachin Jain sachin.ja@icicisecurities.com Sovereign gold bonds offer a good alternative to take exposure to gold as it offers additional interest. There are no annual recurring expenses as compared to gold ETFs (expense ratio in ETF is ~1%) and no storage hassle like those involved in physical gold holding. As per Union Budget 2016-17, any capital gains arising on redemption of the sovereign gold bond scheme would be exempt from tax. If these bonds are sold in secondary market before maturity, capital gains arising on such transaction will taxed @ of 20% with indexation if sold on or after 3 years and would be subject to marginal tax rate if sold before 3 years. Gold back in limelight Indian gold prices have gained around 5% since the start of 2017. The uncertainty surrounding economic policies in U.S. post the new president along with rising global inflation are the key factors driving gold prices. Also, concerns over the outcome of the French elections and uncertainty over Donald Trump s foreign policy has kept gold in limelight. The unpredicted historic global event of Brexit has given rise to a fresh wave of uncertainty in the global financial system. As a result, there has been a flight to safety and safe havens like developed market sovereign bonds and gold. Hence, any escalation in geopolitical tensions could provide an important turning point for gold, which could extend its gains. Exhibit 1: G o ld prices saw a good rally in 2016 on geopolitical events and revival in demand 35 30 25 20 15 10 5 0-5 -10 20.3 CY06 16.0 CY07 26.1 CY08 24.2 CY09 23.2 CY10 31.7 CY11 12.3 CY12-4.5 CY13-7.9 CY14-6.6 CY15 11.3 CY16 Indian Gold price return Source: Bloomberg
Historical Prices Exhibit 2: Issue Period Issue Price ( /gram) Sovereign Gold Bond 2015-16 Nov 5 - Nov 20, 2015 2684 Sovereign Gold Bond Scheme 2016 Jan 18 - Jan 22, 2016 2600 Sovereign Gold Bond Scheme 2016 Series II Mar 8 - Mar 14, 2016 2916 Sovereign Gold Bond Scheme 2016-17 Series I July 18 - July 22, 2016 3119 Sovereign Gold Bond Scheme 2016-17 Series II Sept 01 - Sept 09, 2016 3150 Sovereign Gold Bond Scheme 2016-17 Series Iii Oct 24 - Nov 02, 2016 2957 Sovereign Gold Bond Scheme 2016-17 Series Iv Feb 27 - March 03, 2017 2893 Price as on February 23, 2017 2946 Source: RBI, ibjarates.com Gold: Medium term outlook positive amid uncertainty Global gold prices started 2017 on a positive note with gold prices up around 5% since the start the start of the year on concerns President Donald Trump will institute protectionist policies and weaken US dollar Market participants believe the US policies under the new President are currently uncertain and will lead to more political and economic uncertainty and less stability in global capital markets. The same is likely to keep demand for gold intact in the near term Rising global political uncertainty with French presidential candidate, Marine Le Pen among the favorites, stoked fears of France leaving the European Union. There are fears that France may follow the UK out of the European Union destabilizing the European economy in the process The medium term outlook, however, remains centered around US Federal Reserve rate hike expectations. US Fed is expected to hike benchmark rates thrice in the year 2017. Any change in expectations would have its impact on gold prices Apart from that, the trend in US dollar, the fiscal policy adopted by the US President, and development in euro zone will determine the future prices of gold. On the domestic front, the key development guiding gold prices will be trend in consumption demand by Indian households Prices in the near term may be range bound as the interest rate trajectory in the US is up while volatility surrounding US and Europe may provide support Issue details The following are the basic contours of Sovereign Gold Bond scheme: o Eligibility: Resident Indian entities including individuals, HUFs, trusts, universities and charitable institutions o Rate of interest: 2.50% payable semi-annually on the nominal value of investment o Minimum investment: 1 gm, maximum investment: 500 gm o The tenor of the bond will be eight years with a redemption option from the fifth year to be exercised on the interest payment dates ICICI Securities Ltd. Retail Equity Research Page 2
o Capital gains tax arising out of redemption shall be exempt from tax. If sold in the secondary market, capital gains arising on such transaction will taxed @ 20% with indexation if sold on or after three years and would be subject to a marginal tax rate if sold before three years o The interest earned on gold bonds would be taxable o Price of bond will be fixed in rupees on the basis of the previous week's (Monday-Friday) simple average of closing price of gold of 999 purity published by the India Bullion and Jewelers Association Ltd. The issue price of the Gold bonds will be 50 per gram less than nominal value. The nominal value of the current series is 2943 and accordingly the issue price is 2893 per gram o The bonds would be tradable on exchanges o Open for public subscription between February 27 and March 03. The bonds will be issued on March 17, 2017 o This is the Series IV of the gold bond scheme in FY 2016-17. Subsequent series would be notified later. Sovereign gold bonds offers the a good option to take exposure to gold as it offers a discount of 50 per gram along with additional interest of 2.50% per annum. The allocation to gold bonds however should be in accordance with the overall asset allocation. ICICI Securities Ltd. Retail Equity Research Page 3
Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 400 093 research@icicidirect.com Disclaimer A NA L YST CERTIFICA TION We /I, Sachin Jain, CA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a Sebi registered Research Analyst having registration no. INH000000990. ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities is a wholly-owned subsidiary of ICICI Bank which is India s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. ( associates ), the details in respect of which are available on www.icicibank.com. ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all s ecurities trading markets in India. We and our associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICI CI Securities generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non -rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same t ime. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation th at any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rat es or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future perfo rmance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in pro jections. Forward-looking statements are not predictions and may be subject to change without notice. ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction. ICICI Securities or its associates might have received any compensation for products or services other than investment bankin g or merchant banking or brokerage services from the companies mentioned in the report in the past twelve months. ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts have any material conflict of interest at the time of publication of this report. It is confirmed that, Sachin Jain, CA research analysts of this report have not received any compensation from the companies mentioned in the report in the precedi ng twelve months. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. ICICI Securities or its subsidiaries collectively or Research Analysts do not own 1% or more of the equity securities o f the Company mentioned in the report as of the last day of the month preceding the publication of the research report. Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report. It is confirmed that, Sachin Jain, CA, research analysts do not serve as an officer, director or employee of the companies mentioned in the report. ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information p resented in this report. Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the co mpanies mentioned in the report. We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equit y Research Analysis activities. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described ICICI herein Securities may or may not Ltd. be eligible Retail for sale Equity in all jurisdictions Research or to certain category of investors. Persons in who se possession this document may come are required to inform themselves of and to observe such restriction. Page 4
ICICI Securities Ltd. Retail Equity Research Page 5