It has been a year since the Rs 25 crore scam of Goodwin Jewellers happened. As many as 1,573 individuals were duped into buying a gold savings scheme that had promised to offer gold jewellery of up to 14 percent more on the investment amount. But, come Dhanteras, which falls on November 13 this year, and that fraud seems to have been forgotten, as many jewellers have come out with gold schemes, yet again. These gold schemes, floated by many jewellers, allow you to invest in a scheme for up to 12 months. They throw a bit of discount to lure you into buying jewellery at the end of the scheme’s tenure.
What are gold jeweller schemes and how do they work?
You can either buy gold jewellery by paying the entire amount upfront or in instalments. A gold jewellery scheme is a sort of an instalment purchase. But they are often peddled as sort of investment schemes wherein you put in a fixed amount every month and at the end of the tenure – typically 12 months – you get to buy jewellery worth the accumulated amount. For instance, Tanishq’s scheme allows you to invest Rs 30,000 to Rs 1.2 lakh every month.
Many times, jewellers offer to pay one or two instalments towards the end as a discount. So, Bluestone Gold Mine jeweller offers to pay the 11th instalment as well as 50 percent of your first instalment.
Broadly, there are two ways in which you accumulate money to buy gold at the end of the payment tenure. The first option allows you to deposit a fixed amount every month. In the end, your total accumulated value allows you to buy gold at the prevailing price then. The second option allows you to buy gold with each month’s instalment at the price prevailing at the end of every month. This gold purchase is just on records and you actually get physical gold at the end of tenure at the price that you bought gold at the end of every month.
Adhil Shetty, CEO of Bank Bazaar says, “Due to fluctuation in prices, the latter scheme might be more profitable.”
Why gold schemes are misleading
Gold schemes come with many caveats.
First, rates differ across jewellers. What’s worse, these keep altering on an hourly or daily basis.
On November 1, Kalyan Jewellers quoted Rs 54,045 per 10 grams for 24 karat gold, while Reliance Jewels priced it as Rs 49,808 per 10 grams. Tanishq held the 10-gram price of the yellow metal to Rs 55,708.
This is because jewellers add the premium of rental, other expenses to their buying price of gold and quote the price, instead of linking it to the movement of the metal on the trading exchanges internationally. It is similar to the price of petrol altering according to the geography, even though international prices may have dipped in the recent past.
That’s how jewellers exercise a leeway to build profits in a non-transparent way. Purity of the gold too remains a mystery, though BIS hallmarking has been a way to understand the purity lately.
To know the indicative gold rate for the day, you can give a missed call to the Indian Bullion and Jewellers Association at 8955664433. Information can be obtained through the website www.ibja.co as well.
Second, the offer of “zero wastage” or “zero making/value addition cost” linked to these schemes is a misnomer. Shetty warns, “Usually, it is restricted to select designs and models only. In case you do not want to buy those designs, you will have to pay the applicable making charges/wastage, which can cancel out the 8-10 percent returns which you make in the whole scheme.”
No regulations to oversee gold schemes
The biggest caveat for gold schemes is the lack of any regulation. On the face of it, gold schemes sound good as they offer you to buy gold in instalments. The problem is that there are no laws governing them. Gold jewellers use attractive words such as “discount on advance purchase,” “Discount on instalment,” “Maturity benefit as discount” and even “bonus as a percentage of instalment” to lure gold buyers.
As a result, when jewellers fold up, like Goodwin Jewellers did a year ago, gold buyers have a hard time recovering their money. In the Goodwin Case, the owners Sunil Kumar and Sudheesh Kumar were booked under the Indian Penal Code Sections 420 (cheating), 406 (criminal breach of trust), 34 (common intention) and the Maharashtra Protection of Interests of Depositors in Financial Establishments (MPID) Act. But gold investors have not yet got their money, or the jewellery that they intended to buy with that money.
Prithviraj Kothari of Riddhi Siddhi Bullion says, “When government gives 2.5 percent interest through Sovereign Gold Bonds, you may always lose money if you invest with those promising to give 6-12 percent.”
Adds Harshvardhan Roongta, Principal Financial Planner at Roongta Securities, “Jewellers may give a couple of instalments to persuade you to opt for the scheme, but they will cover it up in the making charges from the bank.”
Moneycontrol’s story on Goodwin Jewellers scam on November 19, 2019 had explained in detail how gold jewellers circumvented the Banning of Unregulated Deposits Act, 2019 by restricting their schemes to less than 12 months and capping returns from the scheme to 12 percent. The 2019 regulation had banned unregulated deposits to offer schemes that last for more than 12 months and gave returns in excess of 12 percent.
The other loophole jewellers exploited was to term their interest offering as a mere ‘discount.’ “Technically, the jeweller cannot offer interest. But instead of interest, it can give a discount. It is permitted by law and there is nothing wrong in it,” says Surendra Mehta, national secretary of Indian Bullion and Jewellers Association.
The Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI) do not allow any type of deposits from anyone else except NBFCs and Banks, agrees Kothari. “Jewellers are offering schemes restricted to the same calendar year. You buy jewellery now and pay in the same year. You cannot carry forward,” Kothari adds.
Corporate jewellers, though, have been offering gold schemes way in excess of one year. Why? “Reliance Jewels, Tanishq accept the money under the SEBI-permitted Public deposit Schemes as they are corporates that can accept public deposits (up to a percentage of their net-worth). But small jewellers are not permitted to borrow or accept money from the public,” clarifies Mehta.
Suresh Sadagopan, Founder of Ladder7 Financial Advisories warns, “Customers opting for gold savings scheme from jewellers should understand that there is no one is regulating this scheme, nor RBI or SEBI. This is falling in cracks.”
What is the best way to invest in gold?
Roongta advises that physical gold should be bought only if you wish to wear it. “For investments, avoid gold jeweller schemes,” he says.
If you have an event such as a marriage planned, for which you are investing then take due precautions, “Stick to reputed jewellers and diversify across jewellers. Also make sure you insist that the jeweller shares all the receipts, documents and payment records pertaining to the investment and keep them safely. Stay away from offers and deals that appear too good to be true,” says Shetty.
For investments, stick to sovereign gold bonds
or gold mutual funds.