You must have heard a lot about Sovereign Gold Bonds in India. SGBs are government securities denominated in grams of gold. They offer a secure and alternative means to invest in gold without the need for physical custody. Issued by RBI (Reserve Bank of India) on behalf of the Government of India, SGBs aim to reduce the demand for physical gold, providing investors with the benefits of value appreciation.
However, do you know that Sovereign Gold Bonds (SGBs) function in both primary and secondary markets?
Let us understand SGBs’ Primary vs Secondary market today!
Understanding Primary Market Issues
In the primary market, Sovereign Gold Bonds are first introduced for sale. This is where the government or companies directly offer their bonds or stocks to investors for the first time.
Primary market issue acts more like a grand opening of a new store, where customers are the investors and the store owner is the government or the company issuing the bonds or stocks.
When you buy something in the primary market, you’re getting it straight from the source, like buying a brand-new product from the store.
In the case of SGBs, when you buy them in the primary market, you’re getting them directly from the government.
Investing in Sovereign Gold Bonds (SGBs) through the primary market involves buying directly from the Reserve Bank of India (RBI) during its regular issuances.
Types of Primary Market Issues
Here are the main types of primary market issues:
- Initial Public Offering (IPO): Companies offer their shares to the public for the first time to raise capital.
- Follow-on Public Offer (FPO): Already listed companies issue new shares to investors to raise additional capital.
- Rights Issue: Existing shareholders get the preference to purchase additional shares at a discounted price.
- Preferential Issue: Issue of shares to a select group of investors, often at a price different from the current market price.
- Qualified Institutional Placement (QIP): Listed companies can issue equity shares or other securities to qualified institutional buyers to raise funds.
- Bonus Issue: Existing shareholders receive free additional shares in proportion to the number of shares they already own.
- Offer for Sale (OFS): Promoters in a listed company sell their shares to reduce their holdings.
- Private Placement: Selling of the securities directly to a small group of institutional or wealthy investors without making a public offer.
SGBs Primary vs. Secondary Market
Sovereign Gold Bonds (SGBs) operate in both the primary and secondary markets in India, each with its distinct characteristics:
| Market | Issuer | Price Determination | Purchase Method | Trading | Maturity |
| Primary | Reserve Bank of India (RBI) | Issue price set by RBI | Directly from RBI or authorised banks | Not applicable | 8 years, with early redemption after 5th year |
| Secondary | N/A (traded between investors) | Market-driven, based on demand and supply | Through stock exchanges | Can be bought/sold anytime during market hours | Depends on the bond’s residual maturity |
SGBs in Primary Market
- In the primary market, RBI, on behalf of the government, directly issues Sovereign gold bonds.
- RBI issues SGBs in different tranches on behalf of the Government of India throughout the financial year.
- Investors can directly subscribe to a new series of SGBs through the RBI during the issuance period.
- In the primary market, the average closing price of gold with 999 purity from the last three business days determines the price of Sovereign Gold Bonds.
- SGBs offer an additional interest income of 2.5 percent per annum to investors.
SGBs in Secondary Market
The secondary market for Sovereign gold bonds involves buying and selling of previously issued bonds between investors.
Once SGBs are issued in the primary market, they become available for trading on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
- After the RBI issues a new series of Sovereign gold bonds, buyers and sellers can trade them through stock exchanges.
- In the secondary market, SGBs may be available at a discounted price due to lower demand, potentially making them cheaper than prevailing gold prices.
- Trading volumes for sovereign gold bonds can be low in the secondary market, potentially requiring investors to sell at a discount to attract buyers.
- Prices in the secondary market depend upon supply and demand, as well as market sentiment towards gold prices.
Why People Prefer SGBs in Secondary Markets
SGBs (Sovereign Gold Bonds) last for eight years. Sometimes, investors can’t hold them for the full term. Thus, they sell these bonds on exchanges, similar to selling stocks.
Discounts in Secondary Market
Old Sovereign Gold Bonds in the secondary market often sell at lower prices. This happens because there are few buyers, so sellers must offer discounts to attract demand.
Availability of Older SGBs
Since 2015, there have been 67 Sovereign Gold Bond issues. While some have matured, 64 are still active. These bonds trade on exchanges, and liquidity varies among issues, affecting discounts.
Disadvantages of Buying SGBs in the Secondary Market
Buying in the secondary market isn’t easy. Low volumes and varying discounts make it complex.
- There may be a shortage of sellers, making it difficult to find the desired quantity of Sovereign Gold Bonds.
- Discounts on Sovereign Gold Bonds in the secondary market may not always be significant, reducing potential savings.
- Buying SGBs in the secondary market incurs brokerage fees, which can eat into potential gains.
- SGBs bought in the secondary market may face low demand when reselling, leading to difficulties in finding buyers.
- Understanding the secondary market for SGBs requires knowledge of various factors such as discounts, liquidity, and brokerage costs, making the decision-making process complex.
- Sovereign Gold Bonds prices in the secondary market may change due to the changes in gold prices, market sentiment, and interest rates. This volatility can affect the value of the investment.
- Compared to other alternatives such as stocks or mutual funds, the secondary market for SGBs may have lower liquidity.
Interest Calculation of Sovereign Gold Bonds in the Secondary Market
Buying from the secondary market still earns 2.5% interest, but it’s calculated on the original issue price, not the purchase price. This affects actual yield.
Conclusion
While buying Sovereign Gold Bonds from the secondary market seems beneficial, factors like discounts, residual periods, brokerage costs, and taxation affect actual gains. So, you must choose wisely between new and existing SGBs, considering all aspects, not just price discounts.
FAQs|Sovereign Gold Bonds
SGBs are available in units of one gram of gold or multiples thereof. You can invest a minimum of one gram, and the highest limit is 4 kg for individuals. However, the limit is 4 kg for HUF Hindu Undivided Family and 20 kg per fiscal year (April – March) for for trusts and similar entities.
Nationalised Banks, Scheduled Foreign Banks, Scheduled Private Banks, SHCIL (Stock Holding Corporation of India Ltd.), designated Post Offices, and authorised stock exchanges sell bonds directly or through their agents.
The Reserve Bank issues the bonds on behalf of the Government of India.
SGBs provide investors with protection for the quantity of gold they pay for by eliminating storage risks and costs. These are stored in RBI’s books or in demat form, reducing the risk of loss compared to physical scrip.
Source– rbi.org.in
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Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.