ETFs, listed MFs to offer tax-saving RGESS

Fund houses will need to launch closed-end funds that conform to RGESS requirements
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First Published: Fri, Sep 21 2012. 02 37 PM IST
Investments made by retail investors in BSE 100, CNX 100 stocks and public sector undertakings such as the navaratnas will be eligible under the scheme.
Investments made by retail investors in BSE 100, CNX 100 stocks and public sector undertakings such as the navaratnas will be eligible under the scheme.
Updated: Mon, Sep 24 2012. 09 07 PM IST
On Friday morning, the government notified the launch of the Rajiv Gandhi Equity Savings Scheme (RGESS) that had been announced in the Budget, the latest in a series of policy changes that have been rolling out over a week now. Finance minister P. Chidambaram clarified that RGESS will be open to investments routed through mutual funds (MFs) and exchange-traded funds (ETFs), besides direct investment by retail investors.
“We think the first-time investor should enter the market with a diversification strategy, the only way to mitigate risk. Any pooled fund like an MF is a good first step to enter the markets,” said Milind Barve, chairman, Association of Mutual Funds in India, the industry’s trade body.
Investments made by retail investors in BSE 100, CNX 100 stocks and public sector units (PSUs) such as the navaratnas will be eligible under the scheme. Follow-on public offers of the above-mentioned companies as well as initial public offers of PSUs with an annual turnover of at least Rs.4,000 crore will also be eligible.
In simple words, this means that not just the scrips forming a part of BSE 100 and CNX 100 index would qualify for RGESS, but also those government-run companies where the government chooses to disinvest its own stake.
The move could act as a boost to the government’s asset sale programme, which has consistently fallen short of target in the past few years. The government needs to raise as much money as it can from the sale of stock in state-run companies in order to reduce its fiscal deficit.
The announcement is significant coming on the heels of an earlier one in which the disinvestment department invited bids from investment banks to act as its adviser on launching ETFs or MFs for asset sales.
The tax angle
The scheme is for those investors with an annual income of less than Rs.10 lakh. They will be able to invest up to Rs.50,000 for a tax deduction of 50% of the investment. If a person invests Rs.50,000 (the maximum that can be invested), a tax deduction of Rs.25,000 (50% of Rs.50,000) can be claimed.
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This will translate to a maximum benefit of Rs.5,000 (investors with a maximum annual income of Rs.10 lakh fall under the 20% income-tax bracket). Those with an annual income of Rs.10 lakh or more will not be able to invest in RGESS. The money needs to be maintained for three years.
Lock-in
Schemes under RGESS will have a three-year lock-in though investors will be able to book their profits after a year. In other words, if you invest, say, Rs.5,000 in an RGESS on 1 January 2013 and the value goes up to, say, Rs.7,000 on 1 January 2014, then you can sell units equivalent to Rs.2,000 after a year. Your initial principle of Rs.5,000 will need to stay invested, though, for three years.
How to buy?
To be sure, investors may not be able to use the regular MF route, but will have to open depository accounts to invest. The notice from the finance ministry says that RGESS-qualifying funds will include ETFs and MFs that have RGESS-eligible securities as their underlying securities and are listed and traded in the stock exchanges and settled through a depository mechanism.
Under the MF route—and apart from the ETFs that will qualify—fund houses will need to launch closed-end funds to be eligible under RGESS. These closed-end funds will be traded on the stock exchange and settled through the depository route. This means that it will have a net asset value (NAV) that will be declared at the end of the day, like any other MF scheme, but will also have a trading price through which investors can buy and sell. Apart from being closed-end, these MF schemes will be actively managed by a fund manager. At present, there are no schemes that conform to the RGESS specifications.
Apart from the ETF and MF route, investors can also buy any of the notified stocks directly. “The idea is to develop an equity culture. If an investor invests directly in equities and after a year he sees his scrips going up and down, he will be sensitized about how equities move and he will learn about equities,” says Thomas Mathew, former joint secretary of capital markets in the finance ministry. Mathew is now the joint secretary to the President of India. Mathew was also one of the chief architects of RGESS when he was in the finance ministry.
Additionally, the government is planning to use the ETF route to carry out stake sales in PSU stocks and the search is also on for an asset management company to carry out the exercise.
Industry reaction
“Finally retail investors and first-time investors will be able to route savings to the capital market which is very good news,” said Sandesh Kirkire, CEO, Kotak Asset Management Co. Ltd.
Jimmy Patel, CEO, Quantum Asset Management Co. Ltd, too, welcomed the decision. “It is good for the industry and investors,” he said. “At least now, investors will get the benefits of professional expertise. But we need to know what sort of MF schemes will be allowed to invest in it.”
Not all are impressed though. “Prima facie, the calculations seems a little tricky if we are targeting this scheme for a first-time equity market investor. There is the three-year lock-in, then there is the one-year twist where the balance has to be maintained for at least 270 days a year, and so on. We hope the retail investor understands this,” says Gautam Mehra, leader-asset management, PricewaterhouseCoopers India. However, Mehra says that the introduction of RGESS put together with the capital market regulator, Securities and Exchange Board of India’s recent incentivizing MFs to penetrate beyond the top 15 cities “will tie up very well”. Mehra indicated that there would be a sizeable chunk of investors in such towns who would have not invested in equity markets till now.
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First Published: Fri, Sep 21 2012. 02 37 PM IST
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