Jewellers face Rs 20,000-cr redemption from gold deposit schemes

Huge capital outflow might increase jewellery sales in the short term but cause a liquidity crisis in the long run

The jewellery sector, which is reeling under lower sales in the ongoing lean season, faces redemptions to the tune of Rs 20,000 crore as a result of closure of gold deposit schemes.

The new Companies Act bars schemes with over 12.5 per cent of annual returns, considering them as public deposits. The Act also restricts jewellers from raising funds through various deposit schemes over 25 per cent of their net worth. Therefore, jewellers offering more than 12.5 per cent returns will have to withdraw the scheme and redeem the fund thus collected.

According to estimates by Ficci, the total deposits under various schemes by jewellers across the country come to about Rs 20,000 crore. Jewellers were using the money collected through gold deposit schemes was utilised as working capital.

Tanishq, the industry leader which has already discontinued its schemes, faces an outgo of Rs 1,000 crore as it has asked depositors to collect money or purchase jewellery equivalent to their deposits within two months. Depositors of Tanishq’s gold accumulation scheme can avail some returns, should they opt to buy jewellery against their investment. However, if they take back cash, they will get only funds equivalent to the amount deposited.

“According to an estimate, about Rs 20,000 crore is deposited annually under various gold accumulation schemes. Since, the new Companies Act bars companies to offer more than 12.5 per cent annual returns, there will be a redemption pressure on companies,” said Mehul Choksi, chairman and managing director of Gitanjali Gems and chairman of FICCI’s gems and jewellery committee.

Pune-based P N Gadgil offered returns of 19 per cent for three-year term, while Mumbai-based Tribhovandas Bhimji Zaveri with 10-month scheme offered 12 per cent annual returns.

“The basic objective of such schemes was to ensure future sales. Enrolling customers for a certain period with luring offers, jewellers were in fact making long-term customer base. So, more than fund-raising, jewellers used to develop a long-term bond with customers, who preferred to buy jewellery for all occasions,” said R K Sharma, chief operating officer, PC Jeweller.

Actor Shilpa Shetty-promoted Satyug Gold has also come out with a gold-accumulation plan, which, according to Satyug’s CEO Raj Kundra, is different from the schemes of other jewellers.

“We buy gold equivalent to the amount deposited by customers on a real-time basis. Our back-end partner is Karvy; Brinks Arya is our delivery partner; and, IDBI is our trustee. We provide customers just a platform to buy gold with a minimum amount if anything untoward happens to the company tomorrow. Customers are safe as we do not keep funds with us. We buy gold and deposit in customers’ account on the day of deposit,” said Kundra.

According to Haresh Soni, chairman of All India Gems & Jewellery Trade Federation, there will be a short-term redemption pressure on the company with the possibility of long-term liquidity crisis.

On redemption, however, jewellery sales will improve for a short-term followed by a lull period.