Govt may broaden scope of Rajiv Gandhi equity scheme3 min read . Updated: 11 Jan 2013, 12:01 AM IST
The scheme is currently limited to investors without a demat account or those yet to invest in equities
Mumbai: The government is considering an expansion in the scope of the Rajiv Gandhi Equity Savings Scheme (RGESS) to attract more small investors to stocks.
RGESS currently offers tax breaks to new investors who don’t have a demat account—an electronic registry for stocks and debentures—or have a demat account, but are yet to invest in equities. The government may now extend the scheme to investors with some equity investments.
“Demat account holders who have done very few investments can be made eligible to invest in the scheme," said a person familiar with the development who didn’t want to be identified because a final decision hasn’t been made.
This person added that the finance ministry was “positively" looking at opening up the scheme to such investors and may announce it in next month’s Union budget.
A finance ministry official, who also didn’t want to be identified, confirmed that such a proposal was being considered by the ministry.
Former finance minister Pranab Mukherjee announced RGESS in the budget he presented in March last year. It allowed retail investors with no exposure to equities and annual income of up to ₹ 10 lakh to invest a maximum of ₹ 50,000 in stocks and deduct half the amount from their taxable income. Going by the current income-tax rate, this translates into a saving of a little more than ₹ 7,500 for taxpayers who invest ₹ 50,000.
The government is also exploring the possibility of raising the tax benefit as well as the maximum investment allowed under the scheme, the first person said. For instance, the tax benefit may be raised from the current 50% to 100%. This means an investor will save at least ₹ 15,000 in tax on an investment of ₹ 50,000. The maximum investment permissible may also be raised from ₹ 50,000 to ₹ 60,000, or even more.
According to Sebi’s notification, securities eligible for investment should belong to the BSE-100 or CNX 100 indices; investments in shares of some high-profile public sector units are also eligible.
Several MF houses are linking some of their investment plans to RGESS, but most of them are not very upbeat, given the complexity of the scheme. “New investors require a frill-free scheme. Riders relating to tax benefits and investor eligibility make RGESS unattractive," said a senior executive at Religare Asset Management Co. Pvt. Ltd who didn’t want to be named.
Religare, which has tailored one of its schemes (Nifty ETF) for investment under RGESS, has at least ₹ 14,000 crore worth of assets under management.
Dhirendra Kumar, chief executive officer (CEO) at Value Research, a Delhi-based market research firm, said the scheme does not focus on the specified objective—mobilizing savings from small and new investors.
“There is a lot of emphasis on opening new demat accounts. Both the procedure for investing and products are complex, and it is not a scheme for which one can opt again and again," he said.
Once an investor puts in the money, he can no longer subscribe to the scheme again since it’s meant only for new investors. This automatically reduces the incentive for MFs to start a new scheme unless they are able to broaden the investor base.
Also, schemes eligible under RGESS need to be listed and this can affect existing MF investors. The demat rule can also be a disincentive. Many investors who invest solely in MFs (and not equities) don’t have demat accounts and may face problems if the schemes they have invested in are linked to RGESS, according to executives in MF firms.
“The investment objective of existing schemes may deviate from the requirements under RGESS. It therefore makes sense to have RGESS-dedicated products," said Nimesh Shah, CEO at ICICI Prudential Asset Management Co. Ltd, which has ₹ 81,400 crore of assets under management. ICICI Prudential has linked its Spice scheme, or Sensex Prudential ICICI Exchange Traded Fund, to RGESS and is also awaiting approval from the market regulator for two more exchange-traded fund (ETF) schemes. Shah said ICICI Prudential would like to link some of its popular schemes, apart from ETFs, to RGESS as well, but the demat requirement was preventing it from doing so.