Rajesh Khosla: Strong Gold Dore Refining Policies Will Help Ease India’s Dependence on Gold Imports

One of the most widely respected authorities on the gold sector, Rajesh Khosla, the Chairman-Emeritus of MMTC-PAMP India, offers a detailed analysis on the current state of the Indian gold industry, and identifies the various challenges blocking India’s progress from becoming a major gold refining centre and producer.

Has Covid had an impact on the progress of the gold policy being worked upon by the industry and Government?

In February 2018, the Government announced in its budget that it would develop gold as an asset class, revamp the Gold Monetisation Scheme (GMS) and develop a gold spot exchange, all essential for gold to complete its journey from “Illegal to Underground to Legal”. Policy-making for gold and that for its consumer interface, jewellery, has always been challenging, as each has different considerations. Let’s look at some key elements concerning gold:

Asset class and banking go hand-in-hand. To implement change, banks will need to transcend from treating gold as a mere commodity to treating it as a financial asset, i.e. what is globally termed as Bullion Banking along with establishing a centralised gold-clearing mechanism. This enables banks to focus on their core competence, viz. currency and credit, leaving the physical to be handled by agencies competent to do so. A Spot Commodity Exchange and an acceptable Good Delivery Standard of the underlying asset is co-terminus with this change. Economic policy dictates we need to move from Make in India for India to Make in India for the world. India’s journey of integration with the way gold is managed globally will also need to address challenges of domestic gold mining and refining. Increasing use of technology in the gold market’s infrastructure will drive efficiency and transparency in gold, be it in its purchase, storage, clearing and accounting, whilst simultaneously inspiring confidence in the consumer. Technology will be the key to implementing any new-look consumer-friendly GMS, and issues related to integrating jewellers with the GMS drive need to be addressed and resolved.

A vibrant domestic jewellery market must translate into a vibrant export market; with greater emphasis on value addition achieved. This is the major challenge for gold jewellery exports, and simplification of some export procedures should surely be the first step.

The Covid pandemic has indeed impacted this work-in-progress, as it has with many other conflicting economic priorities. We need to be understanding, patient and supportive.

Rajesh Khosla

Is there a bright future for the gold refining sector in India? What steps is the Government considering to boost gold refining?

The advantage of Doré refining over importing gold bullion is that the value addition gets done within the country, thereby generating employment, saving foreign exchange, and generating tax revenues for the Government as direct taxes are paid on refining income. Economic policy should thus distinguish between import of gold bullion and import of Gold Dore and prioritise the promotion of refining  in India to international standards.

Refining in India is challenging, as it caters to a single domestic market and pre-supposes that the domestic market for gold will exist throughout the year. But as we see, this is not so. Since the average ex-mine to arrival to refining to finished inventory sale cycle is almost 21 days, refineries must be enabled to operate in an environment where they can cater to a global market, of which domestic demand will always command priority but not be the “sole” market. Access to bullion banking becomes a key enabler.

Key issues that will determine the future of gold refining in India are:

  1. Ability to sustain payment for raw material supplies is inextricably linked with ability to sell the refined output. When the domestic market for gold is stressed, refiners operating in a one-way domestic market need an alternative to reneging on their long-term contracts with mining companies, to avoid grave consequences, be it commercial, reputational, country negative perception, as well as inability to resume off-take when conditions become normal. To enable export, and in view of high value, a quick and transparent mechanism for Customs duty refund, IGST/GST refund, export pricing, etc. is needed; on-line credits is a key enabler.
  2. RBI authorised banks to import gold bullion to maintain metal accounts in the books of their overseas supplier banks. This enabled overseas supplier banks to extend a credit line to the importing bank, convert the line into a corresponding metal quantity, apply an end-of-day mark-to-market valuation for the outstanding metal ounces, and settling the metal basis dollar remittance of the metal as priced. The facility may or may not attract interest denominated in terms of metal. The metal account is termed as an Unallocated Precious Metal account. Internationally, mining companies settle their Dore contracts in terms of metal; likewise banks funding the supply of gold Dore also transact in terms of metal. The bank funding the transaction credits metal ounces to the mining company against each Dore lot, in turn debits in its books the Refiners Unallocated Metal Account, thus funding the transaction. Refiners either deliver the refined metal to the bank or price the metal basis their sale of refined output; the foreign exchange remitted results in a metal settlement. The transactions for gold bullion and for gold content in Dore are identical, hence need identical treatment.
  3. Lack of anti-money laundering (AML) and compliance rules regulating gold Dore import exposes the nation to huge criminal and reputational risk. Whereas LBMA-accredited refineries strictly adhere to an annual independent audit of their supply chain, thus dealing only with the organised mining sector, dealings with artisanal and small-scale miners (ASMs) carries inherent risks. Smaller refineries are unable to deal with the established mining companies hence perforce deal with ASMs. There is a need to evolve a user-friendly methodology to address compliance concerns in gold refining. This will also enable global compliance in India’s financial dealings.
  4. India has one LBMA-accredited Good Delivery Gold refinery and another twenty-four licensed by BIS. Indian Commodity Exchanges are approving some domestic refineries to deliver their refined gold towards settlement of exchange traded contracts. At the last count, five domestic refineries stand approved, of which one is LBMA-accredited and four are India Good Delivery standard certified. Notwithstanding, RBI does not permit banks to source domestically refined gold bullion from such accredited refineries. As a result, banks continue to import gold bullion rather than sourcing from exchange-approved domestic refineries. This not only defeats the purpose of setting/encouraging domestic value addition refining in India but also discourages foreign investment in Gold Refining. Banks are keen to transact (basis their own compliance norms) and await RBI approval to do so.
  5. The absence of a user-friendly/ timely refund of duty procedure prevents refiners from supplying duty-free gold to exporters.
  6. The Central Board of Indirect Taxes and Customs (CBIT&C) issues a fortnightly notification declaring the value of gold for gold bars imported under Chapter 71 of the Customs Tariff Act. Gold bullion imported over a fortnightly period thus enjoys the “same” tariff valuation, notwithstanding day-to-day international price movements within. However, the tariff value of gold content in gold Dore is determined by using the LBMA gold rate on the AWB (airway bill) date. Since gold Dore arrives in various lots over the fortnight, this results in differential valuation treatment for its “gold” content vis a vis gold bullion import over the same duration. The potential for arbitrage gets exacerbated as additionally, refiners have to pay 3% IGST on gold Dore import vis a vis NIL IGST for gold bullion import. Tariff valuation of gold content, be it in gold bullion form or in gold Dore form, where both forms enjoy a concessional import duty, needs to be in harmony.
  7. Operating in a domestic sale only market necessitates requests for extension of time in making remittances during prolonged duration of market stress. RBI Master Direction RBI/FED/2016-17/12 dated 1st January, 2016 (updated on 27th January, 2020) deals with the regulatory framework for “Import of Goods and Services”; it stipulates that remittances against imports should be completed not later than six months from the date of shipment. AD Category – I banks are permitted to consider granting extension of time for settlement of import dues up to a period of six months at a time (maximum up to a period of three years) for delays, etc., including financial difficulties. Gold Dore import remittance does not enjoy such treatment, overlooking its essential raw material nature.
© Chopard
© Chopard

Would an increase in the import duty differential between Gold Dore and bullion be a possible solution to the predicament of the refining sector?

It would help, but is, at best, a short-term band-aid approach; the long-term solution is to address the major issues mentioned above.

Is digital gold a popular investment option in India? Your thoughts on the Gold Savings Account… What was digital gold’s share of total gold investment demand in the past 12 months?

It is becoming increasingly popular among the millennials, who are digital savvy and value its convenience. Gold Savings Account is still in its infancy, and has some time to go before it is featured as a regular portfolio investment. Digital gold holdings have yet to reach double digits. The key is to unlock the value of digital gold holding by making it on par with any other financial instrument, i.e. converting it into a tradable financial asset. Lots more regulatory homework is needed, but definitely it’s the way forward.

Relative to the diamond industry, does the gold sector have easier access to bank finance?

If anything, the diamond industry continues to enjoy significant financing; when it comes to financing gold, the concept of unsecured/open credit is significantly non-existent. Any form of financing gold needs fiscal security, given its nature of a quasi-currency; and of course, a very comprehensive KYC.

What is the potential for gold mining in India?

India currently  produces just 1.5 tonnes of gold per annum from one operating gold mine. India’s geology hosts the potential to domestically produce 100 tonnes of gold per annum from 20 new gold mines that are currently stalled in the permit process;700 tonnes of gold has been discovered and defined to date from only limited exploration by the Government and gold exploration companies. A significant amount has been invested by expert gold explorers over the last two decades. These permits are pending under Section 10A2b and need to be expedited immediately, which will enable almost $2 billion of investment planned across 20 gold mine projects in poor rural areas and $1 billion per annum from ongoing annual operational costs spent locally. It has the potential to create employment  of 100,000+ jobs in poor rural areas from 20 new mines employing approximately 500 workers per mine on average, and reduce CAD by $5 billion per annum by the local production of 100 tonnes of gold per annum. If policy for gold development could be simplified, incentivised and undergoes some minor amendments to fall in line with international gold jurisdictions such as Australia, Canada for example, then India would see a huge influx of investment towards gold exploration and fast tracking development of dozens of existing gold mine projects that are waiting to move into production.

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