Why Should You Stay Away From EMI-Like Gold Schemes Run By Jewellers?

Gold is an expensive affair for a majority of Indians. Making small investment towards gold for the future is almost a tradition in the country.

India's love for gold has been fueled by gold schemes run by jewellers. Investors opt for these EMI (equated monthly installments)-like savings schemes that allow them to set aside a fixed amount every month to purchase jewellery from the jeweller who runs this scheme, at the end of 12 months or so.

These "gold schemes" have varied names and have attracted many to make savings towards the purchase of jewellery for marriage or other family events or for investment purposes.

The danger of investing in them has come to light once again after Goodwin Jewellers in Mumbai recently failed to honour their commitment to depositors.

How do these schemes work?

Generally a gold or jewellery scheme will allow a customer to deposit a fixed amount every month towards the scheme for a tenure agreed upon at the start of the scheme. At the end of the tenure, the customer will have to purchase gold from the accumulated money (with an option to add on to the amount, if interested) at the jeweller's store at market rates prevailing at the time of maturity of the scheme.

The jeweller may offer a bonus or discount on participating in the scheme. It is popular for the jeweller to make a month's installment towards the scheme as incentive or offer a gift voucher.

Purpose of these schemes

While it allows users to save for a large purchase to be made on a future decided date, jewellers use them to attract buyers and create working capital for themselves. These schemes help increase their sales and are popular among middle-income group customers in the Southern and Western parts of India.

The problem

Goodwin Jewellers was a well-established name and was in the business of precious metals for over two decades. The Thrissur-headquartered brand has 14 shops in Mumbai, 2 in Pune, 5 in Kerala and two in the Middle East.

Customers opting for the schemes do not anticipate the failure of an established business or losing their money, like in the case of chit fund frauds. A common customer will not be well-versed with recent changes in the law and won't expect a familiar name to default on payments or go bankrupt.

Further, these schemes promise a waiver of one month's installment in an annual scheme, which would mean returns of 9 to 10 percent, and is definitely an attractive deal to an average customer.

According to a Times of India reporting quoting a former senior official with the Ministry of Corporate Affairs, as of today, there is no protection given to small depositors, who make investments less than Rs 1 lakh if the company goes into liquidation. As the amount is small, it does not fall under the protection of the Insolvency Bankruptcy Code and will only be treated as unsecured credit or trade advance.

Rules

A public limited company is allowed to accept deposits from the public under the Companies Act 2013. There is a 12.5 percent limit on the returns and the total deposits that such a company can receive are capped at 25 percent of the net worth of the firm.

In 2016, there was a change in compliance regulations of the Act, wherein private limited companies cannot take deposits but were allowed to take advances for sale of goods, wherein goods or money has to be given to the customer in 365 days, without any returns or interest.

Some reputed names in the jewellery business have updated their gold schemes accordingly, but these may be mistaken for deposit schemes by customers due to they tricky titles. Note that they are actually advance on sales and legal. These schemes offer discounts and not interest as an incentive.

Banning of Unregulated Deposit Schemes Ordinance 2019 has barred contracts that make advances into a deposit scheme.

As for whether or not there are any regulations for gold-distributors that are neither listed as private or public companies, the facts remain unclear. Such schemes, if any, run by them are most likely illegal.

What should you do?

These schemes come with many regulatory risks, as explained above. If you do wish to participate, opt for a reputed brand and if the offer is too-good-to-be-true, stay away from it.

If the intention is to making returns from an increase in gold prices, there are RBI's sovereign gold bonds, gold ETFs and even gold mutual funds to choose from.

However, if you have plans to purchase jewellery for an occasion and plan on investing in the scheme for the sake of it, you can alternatively start depositing in an RD (recurring deposit) at the bank for the jewellery purchase. It will be secure (especially if the deposit has been made at a reputed bank for less than Rs 1 lakh) and you could set the tenure as per your preference while earning reasonable interest on it. On maturity, you will be able to purchase gold from any jeweller.