The game has changed for gold saving schemes

Workaround Some jewellers are circumventing the rules 

by reducing the tenure of their schemes

Rajalakshmi Nirmal :BL :29 june 2014

Jewellers are closing down schemes that accept money for over a year, thanks to the new Companies Act

Did you know that Tanishq, a national jewellery retailer, has stopped accepting fresh deposits under its gold savings scheme?

This is because the new Companies Act, notified recently, has laid down certain conditions for collection of public deposits by companies (other than banks and NBFCs). And unless jewellers satisfy these conditions, they cannot run deposit schemes.

Sandeep Kulhalli, Senior VP, Jewellery Retail and Marketing, Titan Company, said: “We have written to the CLB (Company Law Board) and the Commerce Ministry for clarifications of the rules and have thus temporarily stalled the scheme.”

However, jewellers running their stores as sole proprietorships or partnership firms can still run savings schemes without having to sweat over the new regulations.

New provisions

Only jewellers registered as private limited companies fall under the ambit of the Companies Act, says Ramesh Vaidyanathan, Managing Partner, Advaya Legal.

The Companies Rules, 2014, has brought deposits taken by jewellers under its regulatory ambit. Says Deep Roy, Associate Partner, Economic Laws Practice: “Deposits taken by jewellers were previously excluded under the definition of ‘deposits’ from the Companies (Acceptance of Deposit) Rules, 1975. As per the Companies (Acceptance of Deposits) Rules, 2014, an advance in lieu of supply of goods will not be a deposit only if it is appropriated and the goods supplied within 365 days.”

The rules further state that “any amounts received by a company, whether in the form of instalments or otherwise, from a person with a promise or offer to give returns, in cash or in kind and any additional amount contributed by the company (jeweller in this case), will also be considered as a deposit.”

Thus, all private limited jewellers who run gold saving schemes for durations of more than a year, fall under the new Companies Act.

The Act also holds that any company that raises money from the public for tenures of more than 365 days has to get rated for its repayment capacity from a credit rating agency and take deposit insurance. With most of the jewellers’ saving schemes running into 24 to 36 months and falling under the definition of ‘deposits’ under the new Companies Act, the reasons for jewellers discontinuing their saving schemes are clear. However, some jewellers have worked around the new rules. They have started 10+1 and 11+1 month schemes. Here, as the duration is less than a year, they manage to stay below the regulator’s radar.

Limits on returns

But even if jewellers do run schemes for durations of over 365 days, the returns they can offer are capped. Right now, the return on gold savings schemes of most jewellers is 15-17 per cent a year, (based on the present value of cash outflows and inflows at the end of the term for a 24-month savings scheme).

Now, the Companies Act says that no deposit scheme should offer a return that is higher than what is permitted for NBFCs. Currently, NBFCs are permitted to offer an interest rate of only 12.5 per cent a year. So, there will perhaps be a redrafting of such schemes by the jewellers.

Companies which do not meet the requirements of the law but have deposits running, need to return the deposits to the public before April 1, 2015, adds Ramesh Vaidyanathan. Otherwise, they will be penalised in accordance with the provisions of the Act.

Finally, some jewellers have recently launched gold deposit schemes that collect old gold and promise to return a higher grammage of gold after a few years.

Experts are divided in their views on whether these schemes are also governed by the new provisions. It’s still wait-and-watch on that one.