Gold retailers winding up installment schemes, to reintroduce them

The 5-lakh odd members of the two 'gold / jewellery purchase schemes' operated by India's largest jewellery retailer Titan Company Ltd is a disappointed lot.

This is because the Tata Group company that owns the Tanishq, Zoya and GoldPlus jewellery brands has decided to wind up its 'Golden Harvest' and 'Swarna Nidhi' schemes to comply with the government's new Companies Act.

C K Venkataraman, CEO, Titan's jewellery division, told dna that the company currently has over Rs 1,000 crore of deposits under the two schemes, which contributed to over 20% in revenues for the jewellery division.

"We sought clarity on the matter from the ministry of corporate affairs on the subject and were told towards June-end that the schemes in the current form would qualify as public deposits. Accordingly, we are closing down the schemes after operating them flawlessly for over a decade now," said Venkataraman. A refund plan has been kicked off, details of which will be given out by the respective Tanishq store operators.

While Tanishq has kick-started the refund process already – to be completed before August 31, 2014, other big and small gold jewellery retail chain operators like Malabar Gold and Diamonds, PC Jeweller, Goodwin Jewellers, Tribhovandas Bhimji Zaveri, Kalyan Jewellers etc are expected to follow suit soon. "We will be discontinuing the gold schemes and reintroducing them in a fortnight or so," said an executive from Malabar Gold.

Given the attractive proposition and a high rate of returns offered by these gold schemes, practically every jewellery retailer, big and small, was using it to get customers. However, the practice was also a huge risk for the household / investor as it was not being regulated by any government body. The new Companies Act attempts to do just that – safeguard the interest of households while also laying down criteria for operators of such schemes.

Under the new Act, the maximum returns that retailers operating such schemes can now offer to deposit holders is 12%. Also, the total deposits have been capped at 25% of the company's net worth. Thus, to comply with these requirements, all jewellery retailers offering gold schemes will now have to wind up, refund and rework the schemes to be able to reintroduce them in the market all over again. According to Aditya Mathur and Jamshed Dadabhoy, analysts at Citi Research, the installment schemes had been an effective way for Titan to lock in consumers for jewellery purchase at its stores.

"Besides easing cash flows to some extent, the substantial up-sell that occurred made the scheme accretive for the company. Overall deposits on its books were around Rs 1,300 crore (last year) and sales via this route were around 15-20% of jewellery sales," Citi Research analysts said in their report on Monday.

The way these schemes worked is that a customer paid equal installments for 11 months, post which the jewellery retailer would contribute one installment. Thereafter, the customer would buy jewellery worth 12 installments.

"Using such schemes is a typical Indian household's approach to savings for a purchase of an expensive jewellery. Besides easing the process (of buying expensive jewellery) these schemes offered attractive rate of returns between 16% and 17%," said Venkataraman. The total deposits schemes, in the case of Titan, were nearly 45% of the company's net worth.

According to Citi Research analysts, all 'companies' may need to comply with the revised regulations. "Mixed response thus far – the other listed jeweller, PC Jeweller, has stopped its 'Jewels for Less' scheme, whereas TBZ continues with Kalpavruksha (but has closed its gold deposit scheme). TBZ may work with the modified Kalpavruksha scheme with around 10 installments – as per company management, schemes below one year aren't treated as deposits," Citi Research analysts said in the report.