New Delhi: Finance minister P. Chidambaram on Friday notified a budget promise that seeks to bring in a new class of investors in a bid to increase the number of stakeholders, deepen the stock markets, and improve the prospects of the government’s asset sale programme.
Chidambaram announced on Friday that the Rajiv Gandhi Equity Savings Scheme (RGESS), aimed at promoting retail participation in equity markets through tax breaks, will be open to investments routed through mutual funds (MFs) and exchange-traded funds (ETFs) alongside direct investment by retail investors.
The stock markets welcomed the move with the benchmark Sensex rising to a 14-month high after the announcements were made.
RGESS will be notified in the next two weeks, the ministry said in a release. The scheme will be applicable to investors who invest up to Rs.50,000 and have an annual income limit of Rs.10 lakh. The total lock-in period will be three years, though investors have the option of trading in the securities after one year.
“It will help in channelling household savings to financial instruments and away from gold,” Chidambaram said. The scheme was conceptualized by the capital market division of the finance ministry and announced in budget 2012.
Investments made by retail investors in BSE-100 and CNX 100 stocks, besides public sector units (PSUs) such as the navaratnas and maharatnas will be eligible under the scheme. Follow-on public offers of the aforementioned companies as well as initial public offerings (IPOs) of PSUs with an annual turnover of more than Rs.4,000 crore will also be eligible.
This may enable greater retail participation in the government’s disinvestment programme, which has been unable to meet its budget targets in the past few years. The government proposes to raise Rs.30,000 crore in 2012-13 from asset sales.
So far, it has mobilized just Rs.124.97 crore—from selling shares of National Buildings Construction Corp. Ltd through an IPO. The government recently cleared the sale of its stakes in four state-owned firms—Hindustan Copper Ltd, Oil India Ltd, MMTC Ltd and National Aluminium Co. Ltd—with the aim of raising around Rs.15,000 crore. In the last fiscal, the government had raised only Rs.13,894 crore from asset sales against a target of Rs.40,000 crore.
Navaratnas and maharatnas are large state-owned companies that have been given greater financial autonomy than others PSUs in order to protect and enhance their market position.
Retail investments routed through MFs and ETFs that invest in the eligible listed securities will also be covered under the scheme, provided they are listed and traded on the stock exchanges and settled through a depository mechanism, the statement said. The MF industry has been demanding that retail investments under RGESS should be routed through them, arguing that retail investors may be unable to take correct investment decisions.
“It is the right thing to do. First-time investors should not be exposed to the volatility of the equity markets,” said Waqar Naqvi, chief executive officer of Taurus Asset Management Co. Ltd. “While it should increase the flow of new investors and widen the mutual fund base, how much of it actually comes in will depend on the equity markets.”
In a separate statement, the government also eased norms to enable low-cost foreign borrowings by Indian companies. The government has decided to dispense with the need for case-by-case approval for such external commercial borrowings (ECBs) as long as these are broadly in line with the loan agreements and guidelines on long-term infrastructure bonds.
“Broadly, borrowings under a loan agreement or by way of issue of long-term infrastructure bonds that comply with external commercial borrowings regulations as administered by the Reserve Bank of India would be eligible for availing of the benefit of this concessional tax regime,” the government said. The government had lowered the withholding tax on interest income to 5% from 20% in the budget. Borrowings between 1 July 2012 and 30 June 2015 will be covered under this.
Chidambaram said that since interest rates are low abroad, companies should be encouraged to borrow from abroad.
“It will simplify the process and all borrowings will now be under the automatic route as long as they adhere to the ECB guidelines,” said Jayesh Mehta, managing director and country treasurer at Bank of America NA.
Chidambaram also asked more state governments to help ease the six-cylinder limit on subsidized cooking gas imposed last week. Most Congress-ruled states have said they will lift this limit to nine by pitching in with the subsidy for an additional three cylinders per household.
Making his case for states to share more of the subsidy burden, Chidambaram said that while the Union government earned Rs.79,751 crore in 2011-12 through the levy of various taxes such as excise and customs duty, the state governments earned Rs.1.127 trillion through value-added tax (VAT) and their share in central taxes.
He also welcomed the Bihar state government’s decision to reduce VAT on diesel to 16% from 18%. The Union government raised the price of diesel by Rs.5 per litre last week.
Chidambaram also said the Union government will levy no excise or customs duty on all cooking cylinders used for household consumption.