March 14, 2013 (TSR-Mineweb) – New rules imposed by India’s government, making it mandatory for jewellers to collect a KYC (know your customer) document from every customer purchasing jewellery worth $919.60 (Rs 50,000) is expected to knock jewellery sales and has taken the wind out of the sails of jewellery stocks.
Generally, consumers desirous of buying gold jewellery tend to shell out cash at the time of purchase. This has, however, made it easier for unscrupulous elements to convert their illegal (black) money into an asset.
In India, jewellery stocks have already weakened by around 25% from peak levels on fears of regulatory policy changes that will curb the surge in gold demand.
The Indian Government has been trying to curb gold demand and has made an amendment to the Prevention of Money Laundering Act. It has decided to enforce KYC norms for retail purchases of gold at all retail outlets.
The Act was passed by the Indian Parliament in December 2012. Though the said provision was initially applicable only for the security and banking sector, jewellery and real estate had been given two months to adhere to the provisions.
At present, retail jewellers collect KYC from customers buying jewellery over $9,196 (Rs 500,000) to facilitate the deduction of one per cent tax deducted at source.
Most jewellery company stocks including Gitanjali Gems, Tribhovandas Bhimji Zaveri, Thangamayil Jewellery, Rajesh Exports and Shree Ganesh Jewellery House tumbled at the bourses in Mumbai, in reaction to the development.
Titan Industries, owners of the Tanishq brand in India, which gained over 60% in 2012 compared to a 26% rise in the benchmark index, has slid by nearly 20% so far in 2013.
Largely on concerns of potential government intervention to restrict gold imports and disappointing Q3 results, the stock is facing “waning macro tailwinds”, according to Morgan Stanley.
In a report, the investment bank has said, the inclusion of the jewellery sector under the Prevention of Money Laundering Bill has reduced visibility of earnings growth and has resulted in relatively low productivity of new stores.
Analysts insist the move will turn out to be negative for jewellery stocks in the short term, but will help clean up the industry. Implementation of the KYC norms is expected to arrest rampant sales tax evasion that is prevalent in some states across the country.
Morgan Stanley added that domestic gold prices are down 10% over the past three months. The investment bank is of the view that the government’s decision to put money laundering controls around the jewellery sector means that sellers will have to follow the KYC requirements, which will crimp sales.
Any proposal that involves documentation for gold transactions could catalyse a consumer shift to the unorganised trade, the report added.
Baccharaj Bamalwa, chairman of the All India Gems and Jewellery Trade Federation said it was an impractical idea, as every 15 grams jewellery purchase would invoke the KYC norms at the current price of gold.
According to the new norm, anybody found guilty of money laundering shall be liable for imprisonment which shall not be less than three years, but may extend to seven years, and will also attract a fine.