Developing Gold Hallmarking in India World Gold Council 2015

Developing Indian hallmarking A roadmap for future growth

Developing Indian hallmarking | A roadmap for future growth

About the World Gold Council

The World Gold Council is the market development organisation for the gold industry. Our purpose is to stimulate and sustain demand for gold, provide industry leadership, and be the global authority on the gold market.

We develop gold-backed solutions, services and products, based on authoritative market insight and we work with a range of partners to put our ideas into action. As a result, we create structural shifts in demand for gold across key market sectors. We provide insights into the international gold markets, helping people to understand the wealth preservation qualities of gold and its role in meeting the social and environmental needs of society.

Based in the UK, with operations in India, the Far East and the US, the World Gold Council is an association whose members comprise the world’s leading gold mining companies.

Methodology

This report is a holistic study of the Indian gold market. We gratefully acknowledge the support of local jewellers, large retailers, gold refineries, trade bodies, gold loan companies, technological experts, hallmarking agencies and associations of these agencies as well as the Bureau of Indian Standards (BIS). Insights were gained from international subject matter experts and the management-consulting firm Oliver Wyman.

For more information

Please contact:

World Gold Council B-6/3, 6th Floor, Laxmi Towers C-25 Bandra Kurla Complex Bandra (East), Mumbai 400051, India +91 22 6157 9100 +91 22 6157 9199 [email protected]

Contents

Introduction 01

Executive summary 02

I: The importance of quality 03 Reduction of leakage 04 Enhance exports 04 Driving employment, boosting industry 05 Enhancing the monetisation of gold 05 Key findings 06

II: Hallmarking in India today 07 Policy and standards 08 BIS hallmarks for gold jewellery consist of several components 08 Depth and breadth of penetration 10 Process and technology 11 Economic viability 11 Key findings 13

III: Hallmarking in other markets: assessing best practice 14 International best practice 16 Key findings 18

IV: Future steps: delivering success 19 Longer-term considerations 22 Key findings 22

01Developing Indian hallmarking | A roadmap for future growth

Introduction

Our intention was threefold:

• To evaluate the existing hallmarking system

• To stimulate debate around how best to strengthen hallmarking processes

• To demonstrate the benefits of an effective hallmarking infrastructure.

This report studies the Indian market holistically and we consulted extensively with both industry experts and other stakeholders from across the supply chain. Insights were gained from subject matter experts, including the Bureau of Indian Standards (BIS) and the management consulting firm Oliver Wyman. We also compared the Indian hallmarking system with best practices in other countries.

Our report is comprised of four sections:

• First, we outline the importance of quality assurance

• Second, we assess the current state of hallmarking, looking at policy, process, penetration, economic drivers and governance

• Third, we consider lessons from other countries

• And fourth, we set out a roadmap for the future.

Our firm belief is that enhancing the hallmarking system in India would rebuild trust in the purity of Indian gold, increase consumer confidence, enhance exports and create employment. It would also be an essential element in any successful gold monetisation programme and a critical element to India becoming ‘ jeweller to the world.’

The World Gold Council has conducted a study to assess the current state of hallmarking in India.


Executive summary

Despite this special relationship with gold, controls around quality and consumer protection have historically been relatively light. Across the value chain, the Indian gold industry has been dominated by small, often artisanal outlets, operating without licence or accreditation.

This has had several adverse consequences.

Jewellery has suffered from under-caratage and there has been a widespread concern over this issue of under-caratage by Indian consumers. This lack of trust has compromised the Indian gold export market and made gold less acceptable as collateral for other productive uses.

In recent years, attempts have been made to remedy the situation, particularly the establishment of hallmarking standards by the BIS. This has driven considerable improvements; however, gold jewellery is still affected by under-caratage of anywhere from 10% to 15%, on average, with widespread differences in purity.

This means that, when a consumer purchases an item of jewellery and is told the gold content is worth INR 10,000, it is, on average worth INR 8,500 to INR 9,000. In other words, consumers are routinely cheated.

The Indian gold market would reap extensive and much-needed benefits, if it were supported by a fully functioning, credible and rigorous hallmarking system.

• Under-caratage would be reduced, to the benefit of consumers

• Trust in gold as collateral would be enhanced, making gold more productive within the Indian economy

• Indian jewellery would be more highly valued, thereby boosting exports

• A strengthened market would sustain growth in the gold jewellery sector, thereby creating significant employment opportunities.

India has a rich tradition of gold consumption and production. Cherished as both an adornment and an investment, Indian households own circa 22,000 tonnes of gold and around 600 tonnes of gold is used in jewellery production each year.

Overall, we estimate that exports could increase to at least US$40bn from US$8bn in 2013 and up to 2.5 million jobs could be created by 2020, if local consumers, overseas buyers and financial markets could place their trust in the quality and purity of Indian gold. We further suggest that the Government’s gold monetisation scheme would be materially more effective and that consumers would, over time, appreciate the benefits of reliable, hallmarked gold.

We do believe that India’s current hallmarking model – built around independent hallmarking and assay centres – should be retained. However, we advocate six key short-term actions to improve its efficiency and effectiveness:

1 Strengthen governance around hallmarking processes

2 Drive customer awareness of hallmarking

3 Incentivise and facilitate targeted expansion of hallmarking centres

4 Use BIS data to develop a ratings system for jewellers

5 Pilot the BIS Unique ID scheme or other technology solutions to support hallmarking

6 Pursue membership of the International Hallmarking Convention or develop an Asian alternative.

Longer term, we would suggest:

1 Moving to a mandatory hallmarking regime

2 Placing the onus of hallmarking on manufacturers.


I: The importance of quality

Gold’s popularity has driven production and India is now a leading manufacturer of intricate artisan jewellery. Purchased by rich and poor across India, it confers status upon those who own it and is thought of as a good luck charm by those who receive it.

Gold has a dual purpose both as an adornment and as an investment. The importance of gold as an adornment means that a significant proportion of this precious metal is bought as jewellery. The importance of gold as an investment means it is vital that this precious metal is appropriately valued.

Yet hallmarking is inconsistent and quality control is weak.

Gold plays a unique role in Indian society: purchased for special occasions, frequently presented in the form of gifts and widely used as a means to preserve wealth. Gold consumption in India continues to rise.

Chart 1: The rise of gold consumption in India

0

100

Source: Metals Focus; GFMS, Thomson Reuters; World Gold Council

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

200

300

400

500

600

700

800

900

1,100

1,000

Tonnes

0

200

400

600

800

1000

1200

These failings would arouse concerns in any geography but in India – a global gold hub – they are particularly challenging for four key reasons.

1 They result in gold leakage for the consumer

2 They affect the reputation of Indian gold and so reduce exports

3 They minimise the opportunity to create employment through an effective hallmarking system

4 They have an adverse impact on gold monetisation.


1 Figures based on interviews with industry experts.

Reduction of leakage

Gold leakage means, in essence, that consumers are being misled when they purchase jewellery (or even coins). They believe they are buying gold of a certain caratage and value. In fact, that gold may be under-carated and overvalued.

The situation is most extreme in the North and East of India, among smaller, less professional jewellery outlets.

This means that the least advantaged consumers are those facing the most significant leakage – estimated at between 10% and 15%.

Hallmarking could reduce that leakage, benefiting consumers across the economic spectrum, but particularly at the lower end.

Enhance exports

Artisanal Indian jewellery is widely prized for its intricacy and craftsmanship. Yet India currently exports around US$8bn of gold jewellery, equivalent to just 8% of the global gold market as shown in Chart 2. This has significant potential to increase if quality control is addressed.

By contrast, imports to India account for 20% to 25% of global gold demand.1

This anomaly arises largely because overseas buyers, e.g. buyers from the Middle East where hallmarking standards are stringent, have little confidence in the purity or quality of Indian gold.

Hallmarking would boost the credibility of Indian jewellery and thereby drive demand from retailers and wholesalers in Western markets.

We estimate that exports could triple to US$40bn if international purchasers felt able to place their trust in Indian gold.

2004-2005

Source: GJEPC, Hallmarking Convention, World Gold Council

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 2013-20140

2

4

6

8

10

12

14

Chart 2: Indian gold jewellery export values

US$bn


2 Figures based on interviews with industry experts.

3 RBI report.

Driving employment, boosting industry

A credible hallmarking system would drive demand for Indian gold both locally and internationally. This would benefit the market at every stage of the value chain, including refining, manufacturing, retailing and ancillary industries.

Given that around 3.5 million people are currently employed across the Indian gold industry, we estimate that an additional 2.5 million jobs could be created by 2020, based on annual growth of 8% over the next five years.

The hallmarking industry itself employs around 2,000 people.2 We estimate this could increase to between 8,000 and 10,000 if hallmarking became more widespread. This would include personnel at hallmarking and assaying centres, supervisors at the BIS and workers in related industries such as chemicals, armoured transportation and couriering and expert auditors.

Enhancing the monetisation of gold

The government is keen to unlock the earning potential of gold lying dormant in households. Its gold monetisation scheme is testament to this ambition. Designed to encourage gold owners to deposit jewellery and coins with banks, the scheme is intended to reduce India’s dependence on imported gold and thereby on foreign reserves.

At present, out of a national gold stock of around 22,000 tonnes (t), just 600t is monetised3 through loans and circa 10t has been deposited at banks through the current gold deposit scheme.

Clearly, this needs to change if gold monetisation is to become effective. Concerns about the quality of gold held by both consumers and other institutions are clearly hampering change.

Under RBI regulations, for example, there is a maximum loan-to-value of 75% on gold jewellery; valuations are based on a 30-day average price and evaluators are obliged to discount under-caratage. Such regulations may deter consumers from monetising their gold.

Similar challenges arise around assaying gold for gold monetisation schemes and other potential products, designed to use gold to stimulate cash flows.

A strong hallmarking system could obviate the need for such strict controls and increase confidence in the integrity and value of Indian gold jewellery.

This could enhance gold monetisation in three specific ways:

• Increase the collateralisation value of gold in productive financial schemes

• Reduce the costs related to rigorous testing of jewellery

• Minimise the application of discounts required as a hedge against potential under-caratage.


Key findings

1 There is widespread inconsistency in the quality and purity of gold in India

2 Consumers suffer from gold leakage

3 This is particularly relevant as Indian consumers hold gold as an investment as well as for adornment

4 International consumers lack of trust in Indian gold

5 Currently gold exports amount to around US$8bn. They could increase to five times the size if global markets had more faith in the integrity of Indian jewellery

6 The Indian gold industry could be significantly larger

7 Currently, it employs 3.5 million people. This could soar to 6 million, if the industry grew by around 8% a year over the next five years

8 Financial buyers cannot rely on the purity of Indian gold

9 This is particularly relevant as the government moves towards launching its gold monetisation scheme

10 A credible hallmarking scheme could reduce leakage, boost exports, encourage economic growth and drive the gold monetisation scheme.


II: Hallmarking in India today

That was over 15 years ago, in 2000, and several important steps have been taken since then. More than 300 hallmarking centres have been opened, over 13,000 jewellers are accredited and the BIS has established a

Source: BIS

Chart 3: Growth of assaying and hallmarking centres in India

Total number of assaying and hallmarking centres

2008 2009 2010 2011 2012 20130

50

100

150

200

250

300

350

Source: BIS

Chart 4: Number of articles hallmarked

Lakhs

2008 2009 2010 2011 2012 20130

50

100

150

200

250

300

The Indian gold market is not only one of the largest in the world; it is also responsible for creating some of the most beautiful, intricate and handmade jewellery. But the industry has long been hampered by concerns around quality control. To combat these concerns, the BIS introduced hallmarking standards and policies, modelled around the UK system.

supervisory structure for both hallmarkers and retailers. As a result, under-caratage has reduced from between 20% and 40% to between 10% and 15%.4

4 Oliver Wyman industry interviews.


However, many challenges remain. Hallmarking is not mandatory and consumer awareness is low. Moreover, hallmarked and non-hallmarked jewellery are both sold in the same outlet; and less than one-third of total jewellery is hallmarked. Operationally, many centres suffer from low profitability, poor equipment and slack processes. And from a supervisory perspective, the BIS is not adequately staffed to fulfil its role effectively.

In this report, we analyse hallmarking from five perspectives:

• current policies and standards

• depth and breadth of penetration

• processes and technology used

• economic viability

• governance.

Policy and standards

The BIS hallmarking policy is clear, comprehensive and well defined. However, while policies and standards are detailed and robust, execution is ineffective.

Whilst consumers have concerns over the caratage of their jewellery, their awareness and interest in hallmarking is patchy. Certain areas of the country are underserved by hallmarking centres, yet numerous centres are under-utilised.

A number of actions have been taken to try and address these issues:

• The BIS has subsidised equipment costs at assaying and hallmarking centres

• It has reduced licence fees for jewellers in small towns

• It offers training programmes for artisans, hallmarking centres, jewellers and its own officers

• It advertises in the press, online and occasionally on television

• It places signboards in accredited jewellers and co-brands with certain larger chains.

BIS hallmarks for gold jewellery consist of several componentsFocus box: BIS hallmarking components

916 J ABC

The BISlogo

A three digit number(out of a set of six predefined values)

indicating the purity ofthe gold in part-per-thousand-format viz;958, 916, 875, 750,

585, 375

A code denotingthe year ofhallmarking

Logo of theassaying centre

Logo/code ofthe jeweller The BIS

logo

A three digit number(out of a set of six predefined values)

indicating the purity ofthe gold in part-per-thousand-format viz;958, 916, 875, 750,

585, 375

A code denotingthe year ofhallmarking

Logo of theassaying centre

Logo/code ofthe jeweller


But the impact of these actions remains low.

• Industry experts believe there should be one hallmarking centre for every 20 to 30 jewellers, suggesting a national network of more than 1,000 hallmarking centres. Yet, even with just 300 centres, many are underutilised and usage at some is as low as 10%

• Among consumers, there is comparatively little interest in hallmarking. However, a short survey of predominantly educated and wealthy people indicated that half would pay more for purity assurance

• Within the unorganised jewellery sector, there is considerable resistance. Small, independent shops benefit from undocumented sales so they are reluctant to formalise their processes. They may gain custom as consumers place more trust in their jewellery. But they face significant loss of revenue from a reduction in leakage and potentially higher tax bills, once all sales are reported.

The BIS lacks adequate resources to tackle these challenges. As a result, monitoring and enforcement are weak. Furthermore, as hallmarking remains voluntary, the BIS is limited in its ability to force through the change.

In June 2015, the government has proposed a new Bureau of Indian Standards Bill, 2015. The new bill will provide a legislative framework for following new provisions other than the provisions in the existing Bureau of Indian Standards Act, 1986 which is proposed to be repealed. The proposed provisions in the new BIS Bill, 2015 will empower the Central Government and the BIS to promote a culture of quality of products and services through mandatory/voluntary compliance with Indian standards through the process of ‘product certification’ and ‘Certificate of Conformity’ with a broad objective of consumer’s welfare. It is also expected to improve enforcement of Indian standards.

The proposed provisions will also promote harmonious development of the activities of standardisation, marking and quality certification of goods and services, to provide for compulsory hallmarking of precious metal articles, widening the scope of conformity assessment, to enhance penalties, to make offences compoundable and to simplify certain provisions in the Act. This is a step in the right direction.


Depth and breadth of penetration

Hallmarking infrastructure has developed rapidly since the BIS scheme was launched in 2000. However, a third of jewellery is still not hallmarked. And there is considerable variation in the quality of those items which are.

• India has approximately 330 BIS recognised assaying and hallmarking centres, while applications for setting up 24 new centres are pending with the Central government as of 31 March 2015

• Tamil Nadu tops the list of BIS recognised assaying and hallmarking centres with 57, followed by Kerala with 39. In terms of zones, distribution is uneven; the South has 153, the West has 65, the North has 111 and the Northeast has only one. Also, out of the 36 states (including UTs), 12 have no testing centres

• Further, more than 60% of hallmarking centres are in India’s 20 largest cities and even within cities, they are often clustered in certain areas. This creates uneconomic competition and means other areas are underserved

• However, there is also a suspicion that some jewellers encourage friends and family to open centres near them to facilitate the hallmarking process. While the BIS does not sanction such behaviour, it is hard to monitor and police

• Discrepancies arise across the jewellery sector too. Some 80% of high value items are hallmarked, but that falls to just 10% in the low value category

• In the moderate segment – the largest in the jewellery market – half is hallmarked and the rest is not

• Low penetration in the less valuable segments of the market arises because customers are less aware of hallmarking, they have a greater propensity to bargain and they tend to buy from small, independent jewellers, who do not participate in the BIS scheme. Keen to pay as little as possible, these consumers may not appreciate that the quality of their purchases is often lower than stated.

Even though, on average, 30% of jewellery is now hallmarked, there are concerns about the quality and credibility of some hallmarking centres. This means the percentage of jewellery hallmarked accurately is expected to be even lower than 30%.

Chart 5: Penetration of hallmarking by different segments of jewellery

%100

80

60

40

20

0

Note: Low value: >INR 15,000, Moderate value: INR 15,000 to INR 50,000, High value: <INR 50,000 – per article at current gold prices.

Source: World Gold Council interviews with market participants

Hallmarked

Low value

90%

10%

50%

50%

20%

80%

Moderate value High value

Not hallmarked


Process and technology

The hallmarking process in India is designed to be methodical and thorough. Performed at the behest of the jeweller, items are expected to undergo several technical and visual checks at certified BIS assaying and hallmarking centres. These include comprehensive sampling and testing, according to clearly defined procedures.

However, the rigour with which these tests are carried out and the extent to which these processes are applied varies considerably from centre to centre.

Economic viability

A typical hallmarking centre employs between seven and ten people and costs 60 to 80 lakhs (6 to 8 million rupees) to set up.

Government subsidies are available at this stage, but they vary from nothing to 30%.

Annual operating costs amount to a further 60 lakhs (6 million rupees), including wages and rent, as well as 10% royalties payable to the BIS and an annual licence fee ranging from 13,000 to 20,000 rupees.

The BIS hallmarking process

BIS certifiedjeweller

BIS recognisedA&H centre

Return to jeweller

Reject ordowngrade

Retest three timesto confirm

100% check ofhomegeneity

Draw minimum10% sample from lot

Fire Assay Test

Pass

Fail

Satisfactory

Unsatisfactory

Jewelley

Fail

Hallmarking


On the income side, pricing is flat and the BIS suggest a fee of 25 rupees per hallmarked article. A typical centre can hallmark around 1,500 items per day, suggesting annual revenues of 90 lakhs to 1.2 crore (9 to 12 million rupees).

However, there are wide variations, according to usage.

• Hallmarking centres need to operate at a minimum of 50% capacity just to break even. In other words, they need to be hallmarking 750 articles a day at the BIS stipulated price of 25 rupees

• They need to operate at a minimum of 70% capacity to achieve a reasonable four to five year payback on their initial investment

• Some profitable centres only achieve the desired returns because they are ultimately controlled or owned by jewellers, creating clear conflicts of interest

• Loss making centres suffer because they operate in areas where there is little demand for hallmarking. In such cases, BIS price controls create further challenges

• Some hallmarking centres cut their prices to as little as 10 rupees per article in a bid to undercut competitors and drive volume

• Some centres use low quality equipment to reduce expenditure and maintenance costs

• Some centres resort to pre-arranged deals with jewellers, agreeing to be less robust in their processes so as to secure more business. Such centres see throughput of around 5,000 articles a day, even though they are set up to hallmark only a quarter of that number, if proper procedures are followed.

Hallmarking can be a profitable business, ~70% utilisation is needed to achieve a reasonable 4–5 year investment payback horizon, as shown in Chart 6.

Price-cutting and malpractice arise at least in part because there is little differentiation between hallmarking centres, so operators are hard-pressed to secure business, particularly in cities.

50 55 60 65 70 75 80 85 90 95 100

1 Payback period is defined on an initial setup cost of INR 70 lakhs.2 100% utilisation level assumes that a typical hallmarking centre can effectively test and hallmark ~1500 articles a day at INR 25 per article.

Source: Oliver Wyman

0

70

60

50

40

30

20

10

Chart 6: Setting up a hallmarking centre; payback period1 vs. capacity utilisation2

Payback period (in years)

Utilisation (%)

Assaying and hallmarking centres need tooperate at a 65 to 70% utilisation level torealise a 4 to 5 year payback period

63.7

33.0

8.5 5.2 3.8

2.4 1.8 1.4


GovernanceThe BIS has developed extensive governance policies. Management roles and responsibilities are clearly defined and BIS personnel are expected to review assaying and hallmarking centres at least twice a year.

Centres are obliged to keep accurate records of their activities and hold these for at least three years. They are expected to conduct internal audits twice a year, record audit findings and implement improvements where necessary.

Each centre is supposed to have a designated quality manager, equipment is expected to be checked on a regular basis, staff should be properly trained and procedures should be in place to rectify issues highlighted when jewellery is tested.

The BIS aims to monitor centres through regular visits, check hallmarked samples on the open market and send them to different centres to verify their purity.

Centres that fall short of quality and accuracy standards are supposed to be fined by the BIS.

The BIS also aims to visit each certified jeweller about twice a year to ensure that they are carrying out adequate quality controls on items sent for hallmarking.

However, these policies are rarely enforced.5

• First, the BIS is understood to be chronically understaffed so it does not have the capacity to carry out the requisite checks on hallmarking centres or jewellers

• Second, the BIS does not have dedicated laboratories for gold hallmarking so there is little capacity for testing jewellery. There are relatively few BIS branches too so activity varies widely across India

• Third, the BIS receives annual licence fees from hallmarking centres and nominal fees from accredited jewellers, but these do not cover its costs. The shortfall in resources means there is little opportunity to increase staff numbers to adequate levels and training is limited. Crucially too, surveillance suffers.

The BIS would need substantial extra resource to be able to implement and enforce its policies effectively, drive hallmarking across India and increase confidence in Indian hallmarked items both nationally and overseas.

Key findings

• Hallmarking infrastructure has developed rapidly since the BIS scheme was launched in 2000

• However, a significant percentage of jewellery is still not hallmarked. And even hallmarked items vary widely in purity

• The BIS has established clear and comprehensive policies and standards. But it lacks the resources and the manpower to enforce them

• Hallmarking is voluntary and consumer awareness is limited so jewellers are neither obliged nor incentivised to become certified

• The BIS has established thorough and robust testing and sampling processes

• However, the rigour with which tests are carried out and the extent to which processes are applied varies considerably from centre to centre

• Hallmarking centres need to operate at a minimum of 50% capacity just to break even at the BIS stipulated price of 25 rupees

• Many cannot achieve this target so they resort to price-cutting and malpractice

• The BIS has developed extensive and detailed governance policies

• But it would need substantial extra resource to implement and enforce these policies effectively.

5 Multiple sources interviewed for this study.


Hallmarking is principally designed to instil confidence. So an effective hallmarking system bolsters both domestic and export markets by giving purchasers faith in the gold they are buying.

Looking across the world, hallmarking systems fall into three broad categories. In countries such as Bahrain, Sri Lanka and Japan, hallmarking processes are owned and operated by the government.

III: Hallmarking in other markets: assessing best practice

In countries such as China, Germany and the US, manufacturers are required to perform hallmarking at source.

In countries such as the UK, France, the Netherlands, Hong Kong and Singapore, independent licensed centres operate as assaying and hallmarking centres. This is the model that India has adopted.

Table 1: Three models of hallmarkingOuality control is achieved using one of three prevalent models, each with its benefits and challenges

Government owned Independent assay offices Manufacturer driven

Description Hallmarking processes owned and operated by government agencies

Independent licensed private centres operate as assay offices

Manufacturer required to perform hallmarking

Benefits Authority possesses control of hallmarking infrastructure and process and therefore better ability to maintain process quality

Easier to manage change in processes

Cost considerations less relevant

Significantly greater ability to cater to a larger geographical area (franchise model)

Processes can be tailored locally within the construct of overarching standards set by the hallmarking authority

Elimination of redundancy in the value chain of gold jewellery as easy for manufacturers to vouch for their own production

Easier implementation of hallmarking in countries with large geographical area

Challenges Reliance on third party freight services for transfer of valuables

Ability to cater to diverse/geographically spread out jewellery sources is a challenge

Centralised processes may not fully cater to diversity of needs arising from various forms/designs of jewellery

Attribution of fault in case of errors may be challenging (i.e. manufacturer vs. hallmarking agency)

Creates additional supervision burden (i.e. hallmarking agancies needs to be monitored)

Economics need to be viable for hallmarking franchises to be attracted to business; potential for localised demand/supply mismatches (given inherent challenge in transportation of jewelry over long distances)

Requirement of building enablers for supervision of manufacturers (i.e. licensing, supervision policy etc.)

High pressure on judicial system for strict enforcement and adequate negative incentives to create deterrence

Challenging to implement with small manufacturers

Typical prerequisites

• Smaller geographical expanse/concentrated jewellery markets

• An efficient public enterprise with adherence to service levels

• Absence of bureaucratic procedures

• High standards of data and record keeping to enhance accountability

• Strong supervisory infrastructure to supervise hallmarking centres as well as retailers

• Combination free market measures (provisions for easy consolidation of hallmarking centres) and govt initiatives (tax breaks and subsiders for centres in under-penetrated areas) to match demand and supply

• Strong supervisory infrastructure to supervise hallmarking centres as well as retailers

• Robust consumer protection laws to provide recourse in cases of fraud

• Imposition of deterrent negative incentives

Example countries

Egypt, Bahrain, UAE, Sri Lanka, Japan UK, Austria, France, Netherlands, Portugal, Spain, Hong Kong, Singapore

Germany, China, Italy, Malaysia, USA

Higher at source control; lower reliance on enforcement

Lower control at source; Higher reliance on enforcement


Government-owned modelThis model has three principal benefits:

• The government controls hallmarking infrastructure so it is better able to maintain quality standards

• It is easier to implement changes in hallmarking processes

• Cost considerations are less relevant.

However, there are several challenges:

• The system relies on third parties to transfer valuable goods

• It is logistically difficult to operate in large geographies where jewellers are widely dispersed

• Centralised processes may not cater to the needs of diverse forms of jewellery.

As such, this model is particularly well-suited to smaller countries or those with concentrated jewellery markets. An efficient, non-bureaucratic and service-oriented public sector is also helpful.

Manufacturer-driven modelThis model has two specific benefits:

• Manufacturers can vouch for their own production so efficiency is maximised across the value chain

• It is easier to implement in large countries.

However, there are challenges:

• An infrastructure needs to be created to supervise and monitor manufacturers

• The model imposes significant pressures on the judicial system to ensure that hallmarking standards are maintained

• Smaller manufacturers may have insufficient resources to comply.

As such, this model is best suited to countries with the capacity to supervise hallmarking centres and jewellery retailers. Robust consumer protection laws and the ability to impose effective deterrents are also helpful.

Independent assay offices This model has two key benefits:

• It functions well in large countries, with diverse, widely-dispersed markets

• Processes can be tailored to suit local needs, under overarching hallmarking standards.

However, there are significant challenges:

• When errors arise, it can be hard to identify who is at fault

• Hallmarking agencies need to be monitored, creating an additional supervisory burden

• The economics need to be viable to attract potential hallmarking franchisees

• There is the potential for mismatches between supply and demand. Cities may see too much supply and less accessible areas may be underserved.

Given these constraints, this model is best suited to countries with high standards of record-keeping and a strong supervisory infrastructure. A combination of free market measures and government initiatives can help to ensure a balance between supply and demand.


International best practice

To assess best practice on a global basis, this study has analysed international systems from the five perspectives discussed in the preceding chapter: policy, penetration, process, economics and governance.

Implementing policyTo drive efficiency and effectiveness, our analysis indicates that five key policies should be adopted.

1 Hallmarking should be mandatory

2 Standards should be detailed, practical and broadly in line with those established by the International Hallmarking Convention

3 The onus of hallmarking should lie with manufacturers, particularly in large countries

4 Hallmarking authorities should increase consumer awareness, particularly if hallmarking is voluntary

5 Dedicated vocational training programmes should be established to ensure staff have the requisite skills.

In the UK, for example, hallmarking is compulsory, jewellery has to be tested and hallmarked, training is offered at assay offices and guided tours are available to increase awareness.

In Singapore, hallmarking is voluntary but certified jewellers have to test and hallmark all gold items. Retailers and manufacturers are certified by the Singapore Assay Office and retailers are incentivised both to seek certification and to advertise it.

In China, the National Jewellery Quality Supervision and Inspection Centre offers vocational courses to groom talent for both jewellery design and inspection.

In Egypt, the Ministry of Trade and Industry set up the Jewellery Technology Centre in 2006 to provide training courses around design, assaying and hallmarking.

In Turkey, the jewellery hallmarking is done on a voluntary basis, penetration remains weak. Export jewellery is hallmarked by the government mints; other hallmarking facilities are located only at large centres (Ankara, Istanbul etc.) and therefore standardised hallmarking is infrequently performed by jewellers in other areas.

PenetrationComprehensive policies and processes are clearly beneficial but hallmarking is most effective when it is widely adopted. Our analysis highlights four key ways to encourage adoption.

• Mandatory hallmarking is arguably the simplest method

• Raising consumer awareness can also increase penetration

• Tax breaks and subsidies should encourage franchisees to open centres in underserved areas

• Secure freight services for valuables should improve penetration in areas where there are few jewellers or manufacturers.

In the UK, for example, there are only four assay offices, but overall penetration of hallmarking is high because it is mandatory on all jewellery above a gram.

In Singapore, only 41 retailers and 33 manufacturers, wholesalers and traders are certified by the SAO, but consumer awareness programmes have been launched and are supported by the retail community.


Process and technologyAppropriate equipment and methodology are essential, if hallmarking is to be carried out effectively. Our analysis has identified seven components of best practice.

1 An XRF machine should be used for homogeneity tests

2 Sampling should be conducted according to specified standards and assay offices may increase sample size or melt items completely if there are serious quality concerns

3 Advanced sampling methods may also be performed, such as historical data-based dynamic sampling

4 Fire assaying should be used to determine the quality of gold

5 The assaying centre should define minimum lot sizes to optimise costs and streamline operations

6 There should be well-defined service levels for each process

7 Laser hallmarking is preferable to surface etching.

In the UK, for example, the number of samples taken depends on the quantity and nature of each parcel. Dynamic sampling is also performed to assess historical success and failure rates of individual jewellery dealers.

In Singapore, jewellery undergoes XRF testing, sampling and fire assaying, while laser hallmarking is performed on all items.

In the UAE. XRF based homogeneity tests, fixed sampling and cupellation are performed according to Dubai Municipal Standards. The Dubai Central Laboratory defines the maximum number of articles that can be submitted and hallmarking is available via etching and laser.

EconomicsHallmarking is most likely to succeed if the centres where it takes place are profitable. This can be achieved in a variety of ways.

• Price setting, where the price is fixed by a government body, following consultation with jewellers, hallmarking centres and customers

• Price capping, which encourages competition among centres, to the benefit of consumers

• Additional revenue generation, where hallmarking centres can pursue related business, such as refurbishing jewellery or customised logos

• Demand assurance through contracts with large manufacturers

• Fiscal intervention via subsidies on initial investment and tax breaks

• Consolidation where necessary, overseen by regulators and monitored through competition law.

In the UK for example, prices are capped so each assay office defines its own pricing with reference to jewellery type. Pricing is also based on sample size and manufacturers’ history, thereby encouraging them to deliver a better product.

The UK industry has also consolidated so seven hallmarking centres have closed and only four remain to cover the entire country. Assay offices generate more revenue by providing tailored hallmarks, sequential numbering for coins and corporate brand logos.

In Singapore, the price is set by the Singapore assay office and defined on a per article basis. Failure and reconfirmation tests are charged at pre-defined rates.

In the UAE, prices are fixed, depending on the method used for assaying and the type of jewellery being tested.


GovernanceHallmarking centres are only truly effective if their hallmarks can be trusted. This relies on effective governance. Our analysis indicates that governance can be strengthened in five key ways.

• Licenses and certifications issued by hallmarking authorities should be subject to evaluation, at least once a year

• Authorities should take random samples from jewellers to ensure hallmarking practices are rigorous

• Severe fines should be imposed if jewellery is not of the stated quality. In certain cases, licences may need to be revoked

• There should be strong rules to minimise conflicts of interest between supervisors and the supervised

• Consumers should be able to test their jewellery independently at an assaying centre of their choice to cross-check hallmark veracity.

In Singapore, the Singapore Assay Office (SAO) notifies certified jewellers two days in advance before conducting inspections. However, consumers can use SAO services to check the purity of items purchased.

In the UAE, strong criminal laws and strict enforcement create a strong deterrence against fraud. Additionally, random inspections are conducted and hefty fines imposed if cases of inaccuracy are found.

In Thailand, the state-owned Gems and Jewellery Institute of Thailand is responsible for the assaying and hallmarking of gold jewellery. But surveillance is conducted by the Office of the Consumer Protection Board and the Tourism Authority of Thailand.

In the UK, manufacturers are ranked based on past success. These rankings are used to determine sample size. Poor performers have to submit more samples, which increases cost; strong performers submit fewer samples, which reduces cost.

Key findings

ModelsThere are three distinct hallmarking models used around the world: Government-owned, manufacturer-driven and independent assay offices.

• Government-owned works best in smaller countries with an efficient public sector

• Manufacturer-driven works best in countries with a strong supervisory infrastructure, robust consumer protection and the ability to impose effective deterrents on rule-breakers

• Independent assay offices work best in countries with excellent record keeping and the ability to monitor and enforce standards. The system also benefits from elements of free market dynamics and government initiatives.

International best practice• Hallmarking is most effective if it is mandatory and

manufacturer driven

• Active monitoring drives compliance and minimises conflicts of interest

• Consumer awareness should be high

• Hallmarking staff need thorough training

• Appropriate equipment and methodology are essential

• Price-capping or bespoke pricing can bolster demand

• Tax breaks and other incentives can encourage centres to open

• Where necessary, consolidation can also help centres to operate profitably

• Random testing by authorities and consumers reduce malpractice

• Strong fines act as an effective deterrent.


IV: Future steps: delivering success

The Indian gold jewellery market is extremely complex. There are more than 400,000 jewellers, most of which are small and independently operated. The manufacturing base is also highly fragmented and many operators are small-scale.

Consumers are extremely value conscious and will sometimes focus more on price than quality, particularly as many are unaware of hallmarking.

Consumers, retailers and manufacturers are widely dispersed across India, imposing considerable logistical challenges on hallmarking in remote areas.

It is also relatively easy for centres and jewellers to ‘game the system’ as supervision and enforcement remain weak.

Nonetheless, improvements have been made since the BIS hallmarking system was introduced. Standards have been developed, more than 300 centres have been opened and awareness programmes have been established.

As a result, 30% of jewellery is now hallmarked, leakage has more than halved to between 10% and 15% and consumer awareness is gradually increasing.

Against this backdrop, we believe that India will derive the greatest benefit from hallmarking if it persists with the current system in the short and medium term, but drives positive change via a range of specific initiatives to:

1 Ensure that governance is effective so hallmarking centres and jewellers operate with integrity

2 Improve consumer understanding of the benefits of hallmarking via a well-planned customer awareness programme

3 Incentivise and facilitate targeted opening of hallmarking centres

4 Use existing analytics to develop a ratings system for jewellers

5 Pilot BIS Unique ID scheme (discussed on page 20) and other technology solutions to support hallmarking

6 Pursue membership of the International Hallmarking Convention or develop an alternative.

In the longer-term, we would suggest more structural changes.

i) Make hallmarking mandatory so all gold jewellery has to be hallmarked

ii) Transition to a manufacturer-driven system as international analysis suggests that this is the most efficient and effective model.

We outline these recommendations in greater detail below.

Strengthen governanceA successful hallmarking system depends on strong governance. We would therefore advocate the following measures:

• Ensure the BIS has national representation and robust internal processes so jewellers and hallmarking centres can be adequately monitored and supervised

• Clarify responsibility for failure between jewellers and hallmarking centres

• Develop more stringent deterrents if jewellers or hallmarking centres breach the rules

• Create and publicise an effective whistle-blower programme against jewellers and hallmarking centres

• Publicise the independent assay option. Already available to consumers once they have purchased jewellery, it is barely used and would help to root out malpractice.


Improve customer awarenessMany consumers are unaware of BIS hallmarking, particularly those living in rural areas. Even among educated consumers, only half are interested in or use BIS hallmarks. Increased awareness will drive penetration and encourage best practice. We would therefore advocate that the BIS:

• Develops and implements a compelling and granular consumer awareness and adoption strategy

• Targets messages to specific audiences, using questionnaires and focus groups to identify gaps in awareness and major concerns

• Identifies feasible modes of delivery, such as roadshows, advertising and stalls at retail outlets

• Learns from previous successful public awareness campaigns

• Measures the impact by conducting surveys and focus groups and tracking increases in hallmarking

• Develops support systems among academics, gold loan companies, NGOs and the media to help propagate the message.

Promote targeted opening of hallmarking centresMore than 60% of hallmarking centres are concentrated in India’s top 20 cities and there is further concentration within the cities themselves. This results in price-cutting and poor practice in concentrated areas and little awareness of or access to hallmarking elsewhere in the country. We would therefore advocate that the BIS undertakes an extensive programme to understand the manufacturing volumes, circulation and sales of gold jewellery at a granular level across the country which would then allow it to identify areas of under and oversupply and design policies to match demand with supply. Tax breaks and other incentives could be offered in areas of undersupply and royalty charges could be fine-tuned in areas of oversupply.

Use data to develop a ratings system for jewellersThe BIS rules stipulate that hallmarking centres should store data for three years. This information is neither checked nor used adequately. If it were properly collected and stored, it could be put to good use. We would therefore advocate that:

• A central data library is created, managed by the BIS and used to store all hallmarking data, which could be used to generate analytics on jewellers and hallmarking centres that can be used in numerous ways

• Dynamic and bespoke sampling should be carried out on lots from jewellers and those with a strong track record would have fewer inspections and require less testing thereby reducing their costs

• Jewellers and hallmarking centres’ performance should be publicised on a central website to actively encourage best practice with reduced royalties offered to the better performing centres, thereby cutting prices for jewellers and driving volumes.

Pilot BIS Unique ID schemes and other technology solutions to support hallmarkingThe current hallmarking system provides scant information to allow consumers to trace items of jewellery. This is natural, given the size of most jewellery items. We would therefore suggest that the BIS should actively pursue piloting its idea of a BIS Unique Identification (UID) system for hallmarked jewellery. This would also appeal to the younger population that’s becomng increasingly digital.

This would offer four key benefits:

• It would allow consumers to track changes of ownership

• It would improve accountability, thereby discouraging leakage

• It would provide consumers with relevant information

• It would allow consumer to use channels including mobile apps, SMS and email to verify the authenticity of their purchases.


Despite these advantages, UID schemes provoke concern across the gold market:

• Jewellers worry about prolonged liability

• Some consumers prefer not to declare gold purchases so as to minimise tax liabilities

• If a photograph is the only way to link an item of jewellery to the card, there is significant potential for forgery

• UID schemes may increase the proportionate cost of small jewellery items on a percentage basis. They may also reduce throughput at hallmarking centres

• A chip-based solution has been considered for the UID project, but it would create significant technological challenges

• Above all, while the UID scheme will enhance traceability and therefore increase jewellers’ accountability, it will neither directly reduce leakage of gold nor increase hallmarking penetration.

We therefore believe that the UID project should be introduced in phases.

• First identify two or three cities with different characteristics

• Roll out UID schemes in these cities, by educating jewellers, consumers and manufacturers about the benefits they confer

• If consumers and other stakeholders respond positively to the scheme and under-caratage is reduced, full-scale implementation could be considered after fine tuning the programme.

Pursue membership of an international conventionThe Vienna Convention was established to encourage the international gold jewellery trade by providing a common set of technical requirements and a Common Control Mark (CCM). There are now 18 members of the International Hallmarking Convention (IHC), all of which are in Europe with one in Israel. Widely regarded as evidence of international quality, member countries allow goods marked with a CCM to be imported without further testing.

If India were to become a member of this convention, it would encourage strong internal standards and robust quality control. It would also drive acceptance of Indian gold on international markets. Joining the IHC involves a detailed four-stage process, designed to ensure that applicants have the appropriate systems, policies and governance in place and that testing and sampling are sufficiently rigorous.

To bolster the chances of success, we would therefore advocate that:

• The authorities should position India as ‘jeweller to the world’ with an extremely strong domestic market and a growing export offer, focused on intricate and unique designs. This could increase export volumes significantly (Chart 7)

• Efforts undertaken by the BIS to establish an effective hallmarking industry should be highlighted

• Key members of the convention should be identified so India can articulate why it should be a member.

If membership is not feasible in the near future, we believe India should take the lead in propagating the idea of an Asian convention, including such countries as China and Thailand, who are not part of the IHC.

Source: World Gold Council survey of industry experts

Chart 7: Potential to increase Indian gold jewelleryexport values

US$bn

2013

8

2020

40

0

5

10

15

20

30

35

40

25

45

5X


Many large Asian markets are structured differently and have different needs from IHC members. There is a high proportion of small-scale manufacturers and jewellers, gold jewellery is deeply rooted in Asian cultures and it is used as an investment vehicle. India and China are also among the fastest growing economies in the world and gold jewellery is a significant share of their gross GDP.

An Asian convention would have three specific benefits:

• Establish a high-quality, common and consistent standard across all Asian markets to promote exports

• Serve as a forum to exchange ideas, technology and best practice

• Promote Asian interests in global gold markets.

Longer-term considerations

We have two longer-term recommendations, all of which could be phased in over the next decade.

Make hallmarking mandatoryToday, around 30% of jewellery is hallmarked and leakage stands at 10 to 15%. Both these statistics have improved considerably since BIS hallmarking was introduced, but there is some way to go. Hallmarking is further weakened by poor practices at hallmarking centres, often driven by under-utilisation.

We would suggest a gradual move to a mandatory regime over the next four to five years.

• First, jewellers and consumers need to understand the benefits of hallmarking. This could be achieved through educational programmes, seminars and the media

• Second, policies need to be made watertight so even small jewellery items should require hallmarking. Jewellers could also be incentivised initially with tax breaks or other benefits

• Third, BIS infrastructure needs to be enhanced both internally, via increased staff numbers, and externally, via increased numbers of hallmarking centres

• Fourth, the new regime should be implemented in a phased manner.

Transition the onus of hallmarking to manufacturersResponsibility for purity lies naturally with the manufacturer so it makes sense to transition the onus of hallmarking to them. This would ensure clarity around roles and responsibilities in the gold industry

and drive consolidation within the unorganised jewellery manufacturing industry, thereby creating economies of scale and enhancing professionalism.

We would suggest a gradual transition over five to seven years.

• First, ensure a clear separation between retailers and manufacturers

– This would include separate licensing requirements, as well as special considerations for talented small-scale or artisan manufacturers

• Second, define a policy to supervise and monitor manufacturers

• Third, facilitate the establishment of adequate hallmarking infrastructure at all manufacturers, such as equipment, computers and data networks.

Key findings

• The current hallmarking system in India is best suited to its short and medium term needs

• However, certain specific initiatives will improve gold market functionality and reputation

• Governance needs to be strengthened throughout the process

• Consumer awareness programmes should be implemented to drive understanding of the benefits of hallmarking

• More hallmarking centres should be opened in areas where none or few exist

• Existing analytics should be used to rate jewellers and adjust testing and supervision requirements accordingly

• BIS Unique ID schemes could be piloted alongside other technology solutions to support hallmarking

• India should pursue membership of the International Hallmarking Convention or develop an alternative Asian convention.

In the longer-term, we would suggest more structural changes• Make hallmarking mandatory so all gold jewellery has to

be hallmarked

• Transition to a manufacturer-driven system.

Copyright and other rights© 2015 World Gold Council. All rights reserved. World Gold Council and the Circle device are trademarks of the World Gold Council or its affiliates.

All references to LBMA Gold Price are used with the permission of ICE Benchmark Administration Limited and have been provided for informational purposes only. ICE Benchmark Administration Limited accepts no liability or responsibility for the accuracy of the prices or the underlying product to which the prices may be referenced.

Other third party data and content is the intellectual property of the respective third party and all rights are reserved to them.

Any copying, republication or redistribution of content, to reproduce, distribute or otherwise use the statistics and information in this report including by framing or similar means, is expressly prohibited without the prior written consent of the World Gold Council or the appropriate copyright owners except as provided below.

The use of the statistics in this report is permitted for the purposes of review and commentary (including media commentary) in line with fair industry practice, subject to the following two pre-conditions: (i) only limited extracts of data or analysis be used; and (ii) any and all use of these statistics is accompanied by a clear acknowledgement of the World Gold Council and, where appropriate, of Thomson Reuters, as their source. Brief extracts from the analysis, commentary and other World Gold Council material are permitted provided World Gold Council is cited as the source. It is not permitted to reproduce, distribute or otherwise use the whole or a substantial part of this report or the statistics contained within it.

While every effort has been made to ensure the accuracy of the information in this document, the World Gold Council does not warrant or guarantee the accuracy, completeness or reliability of this information. The World Gold Council does not accept responsibility for any losses or damages arising directly or indirectly, from the use of this document.

The material contained in this document is provided solely for general information and educational purposes and is not, and should not be construed as, an offer to buy or sell, or as a solicitation of an offer to buy or sell, gold, any gold related products or any other products, securities or investments. Nothing in this document should be taken as making any recommendations or providing any investment or other advice with respect to the purchase, sale

or other disposition of gold, any gold related products or any other products, securities or investments, including without limitation, any advice to the effect that any gold related transaction is appropriate for any investment objective or financial situation of a prospective investor. A decision to invest in gold, any gold related products or any other products, securities or investments should not be made in reliance on any of the statements in this document. Before making any investment decision, prospective investors should seek advice from their financial advisers, take into account their individual financial needs and circumstances and carefully consider the risks associated with such investment decision.

Without limiting any of the foregoing, in no event will the World Gold Council or any of its affiliates be liable for any decision made or action taken in reliance on the information in this document and, in any event, the World Gold Council and its affiliates shall not be liable for any consequential, special, punitive, incidental, indirect or similar damages arising from, related to or connected with this document, even if notified of the possibility of such damages.

This document contains forward-looking statements. The use of the words “believes,” “expects,” “may,” or “suggests,” or similar terminology, identifies a statement as “forward-looking.” The forward-looking statements included in this document are based on current expectations that involve a number of risks and uncertainties. These forward-looking statements are based on the analysis of World Gold Council of the statistics available to it. Assumptions relating to the forward-looking statement involve judgments with respect to, among other things, future economic, competitive and market conditions all of which are difficult or impossible to predict accurately. In addition, the demand for gold and the international gold markets are subject to substantial risks which increase the uncertainty inherent in the forward-looking statements. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the World Gold Council that the forward-looking statements will be achieved. The World Gold Council cautions you not to place undue reliance on its forward-looking statements. Except in the normal course of our publication cycle, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, and we assume no responsibility for updating any forward-looking statements.

S001201507

Published: July 2015

World Gold Council10 Old Bailey, London EC4M 7NG United Kingdom

T +44 20 7826 4700 F +44 20 7826 4799 W www.gold.org

http://www.gold.org

Date post:	13-Aug-2015
Category:	Business
Upload:	andrew-williams-jr-president-fivepointsyouthfoundationorg
View:	241 times
Download:	3 times

Developing Gold Hallmarking in India World Gold Council 2015

Business