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Commentary

Reliance Capital Displays Patriotism By Not Selling Gold

Reliance Capital has decided not to sell gold as an investment product, in a press release that defies imagination:

Reliance Capital, a part of the Reliance Group, strongly supports
the Government’s publicly stated objective of minimizing gold imports that are seriously
hurting the country’s economic interests.

The Company has decided to suspend sale of gold in physical form (including inter alia
supply of gold coins for sale through India Post), and also as an investment product,
across all its businesses and subsidiaries.

In addition, Reliance Capital’s Commercial Finance Division has decided to suspend
financing against gold as a security.

Further, Reliance Capital Asset Management (RCAM), a part of Reliance Capital, has
decided to suspend new subscriptions in Reliance Gold Savings Fund. Existing SIP
investors will not be affected by this decision

This doesn’t make too much sense. I don’t believe that any such stopping of gold sales is in any way related to helping the government or anything like that. Colour me cynical, but businesses aren’t built on such shallow patriotism. Plus, if the group that owns Reliance Capital cared about India’s economic interests, they wouldn’t be trying to launder money (alleged in a UK tribunal order against a UBS trader indicted of creating the vehicle).

So what else can be there? Suspending of commercial finance against gold as a security is probably a sound business decision – in the face of falling gold prices, they must be facing pressure on such loans as the collateral value has fallen. Additionally, with Reliance Capital vying to become a bank, they might want to get on the right side of the RBI about gold-based-lending, where RBI wants banks to curb all sorts of lending against gold.

Reliance Capital has about 2,200 cr. of AUM in the Gold Savings Fund, and sold about 5 tons (my estimate: 1,400 cr. worth) of  gold in 2013. (ref: Reuters) This is fairly large, but you have to note that they haven’t suspended the Gold ETF itself (which is what the Gold fund would buy). So you can buy the ETF but not the gold fund.

Reliance Capital would import most of its gold through banks. Due to a recent RBI directive, that avenue requires a 100% cash margin (versus buying on credit), which would have severely dented profitability. While the official statement is being spun as a Sahara-ish I-Love-My-Country view, it will do nothing to actually help the country (there are other sources to buy from) and it probably masks the real reason. I hope it’s not any more sinister than the situations I mentioned above.

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