PNB fraud: The 80:20 gold import controversy
The August 2013 notification by the RBI disallowed star trading houses, premier trading houses, and units in special export zones from importing gold to sell in the domestic market. The objective of this notice was to restrict import of gold for use in the domestic market, thereby, containing India’s swelling current account deficit.business Updated: Mar 09, 2018 07:21 IST
The 80:20 bullion rule has been in the news in recent days, and formed one part of the Union government’s efforts to deflect criticism from its handling of the fraud at the Punjab National Bank (PNB) and turn up the heat on the opposition United Progressive Alliance (UPA).
On 21 May 2014, five days after the UPA government was defeated at the polls and five days before the new National Democratic Alliance (NDA) government took over, the UPA took a decision allowing so-called star trading houses (STHs), premier trading houses (PTHs), and units located in special export zones (SEZs) to import gold and sell up to 80% of the imports in the local market.
Until then, the rule had been that such firms could only import gold under the condition that all of it would be exported (after converting it to jewellery). The change resulted in a spike in gold imports. In the six months between June 1 and November 30, 2014, gold imports rose to 553 tonnes. Of these imports, almost 60% was accounted for by 13 PTHs and STHs.
Traders hoarded the metal, benefiting from lower import prices. The May 21, 2014 notification of the Reserve Bank of India (RBI) making the change overturned an August 14, 2013 notification by RBI that disallowed STHs, PTHs, and units in SEZs from importing gold to sell in the domestic market. The only entities allowed to do so were banks and a few other agencies (and these were further required to ensure that 20% of their imports were re-exported). The objective of the August notification was to restrict import of gold for use in the domestic market, and, thereby, contain India’s swelling current account deficit.
The Indian Bullion and Jewellers Association cried foul at the change in policy which, it alleged in a July 26, 2014 letter to the RBI, helped only large private trading houses and conglomerates, many of which had no history of gold imports, and were not interested in promoting the jewellery business. “(They) do not have a mechanism to ensure the end use of gold sold,” the letter said — as 20% would have to be re-exported — and they “are engaged in circular/fictitious export”.
The NDA subsequently (towards the end of 2014) scrapped the August, 2014 change.
The 13 trading houses that increased their imports during the period for which the scheme was active are: Rajesh Exports, MD Overseas, Kundan Rice Mills, Kanak Exports, Edelweiss Commodities, Zaveri & Co, Riddhi Siddhi Bullions, Khandwala Enterprise, Jindal Dyechem, Gopal Jewels, Reliance Industries, Gitanjali Gems, and Su-Raj Diamonds.