Jewellers cautious of new gold schemes under Companies Law

Indian jewellers are in a fix post the announcement of the new Companies Act and allied rules imposed in April. The new rules and regulation have impacted the popular gold schemes that gave them access to capital. According to a report, some jewellers have stopped enrolments to new schemes until they get a better understanding of provisions in the new law, while others are continuing with plans that don’t extend beyond a year.

Gold saving schemes have been popular with buyers as well as gold retailers. The retailers are known to bank on such for working capital requirements and a guaranteed customer base. It’s the equivalent of interest-free loans that they deploy back into the business. 

The new Companies Act that was effective since April 2014 promotes transparency. Experts say the new law will bring more transparency in corporate governance, while allowing flexibility to companies in exceptional situations. However, some provisions are still to be notified by the Government.

For the jewellery industry, the crux of the problem is the installments that jewellers collect from customers are now deemed to be a deposit. However under RBI rules, no deposit can pay more than 12.5% as return, which means schemes of almost all companies become illegal. There is a loophole, though. Payments are considered advances, not deposits, if the supply of goods or services takes place within a year.

“We hope now the schemes would be more systematic and regularised,” said Mumbai-based bullion expert Bhargava N Vaidya in a report, who pointed out that jewellers are waiting for a new government at the centre before launching their revamped schemes. “There is consensus among political parties that any scheme which does not facilitate gold hoarding or brings out the gold at the households would be encouraged. So once the new government comes, the schemes would get a new shape,” he said. “The key thing is these schemes should act as saving instruments rather than taking the form of gold hoarding.”

India accounts for almost a third of the global jewellery demand, according to the World Gold Council (WGC). India’s annual jewellery demand in value terms is Rs 1.34 lakh crore, half of what it spends on healthcare and about 2% of the gross domestic product. The south, which has 11 of the top 20 jewellery retailers in India, accounts for almost 40% of sales. Despite various curbs to check the current account deficit, India consumed 974.8 tonne of gold in 2013, up from 864 tonne in 2012, according to WGC. However, for the first time India lost its world’s top gold consumer rank to China, which bought 1,065.8 tonne.

Following the implication of the new law, Tanishq has temporarily suspended its Golden Harvest saving scheme for fresh enrollments. Tanishq is part of the group’s listed arm Titan Industries which derives two-thirds of its revenue from jewellery. “We are in the process of realigning the scheme in accordance with the new rule soon and I can share details only after that,” C K Venkataraman, CEO of Titan jewellery division told ET in an interview.

Gold schemes are largely unregulated in the country with different jewellery chains having their own formula. But such schemes—where a customer can pay as little as Rs 500 a month at certain jewellers—enable the middle-class to buy the precious metal, whose price has soared over the past few years. There are several popular gold saving schemes from renowned jewellers like Golden Harvest by Tanishq, Tamanna by Gitanjali Jewels, Monthly Installment Scheme by Malabar Gold and Diamonds, Kalpavruksha Plab by TBZ, Sawansukha Jewellers, Savings Scheme by GRT and many more.

Many jewellers like the Kerala-based gold retailer Joyalukkas said it has stopped schemes exceeding 12 months. “We are waiting for clarity and seeking legal opinion. Based on that, we will revamp the schemes,” said Deepak Xavier, finance head of Joyalukkas in a report. Xavier said that scheme guaranteed customers for the jewellery chain, which will be affected now.

An executive at another Kerala-based jeweller said that such schemes do not qualify as deposit schemes and are only “purchase advance” schemes. However, he said more clarity is awaited.  Chennai-based GRT Jewellers, which derives 80% of its revenue from gold jewellery sales, and Nathella Jewellery have also revamped their schemes to comply with the new rules. Nathella has limited the duration of its schemes to 11 months. P.N. Gadgil Jewellers also have the God Rush Investment Plan which can start from investment as small as Rs 500. They are divided into 12 months plan, 24 months plan and 36 months plan respectively. Saurabh Gadgil, Managing Director of P.N. Gadgil Jewellers said, “Our schemes are compliant to all current regulations. If there are any changes in the regulations we are geared to make changes in the schemes and policies.”

Few jewellers did not see the new rule hurting demand. “Investing in gold would not come down because of this. For housewives and people from middle-income group, such schemes come as a boon,” said one of the executive. Ashok Minawala, director at All India Gems & Jewellery Trade Federation, admitted that the new rule will force jewellers to do a rethink, but said it was too early to judge their impact. “Such schemes have been going on over centuries and are based on trust between jewellers and customers,” he said. “We will make a representation at the industry level and see if this norm can be changed for us.”