About 30% of RGESS scheme accounts remain empty

Total investments in the scheme valued at Rs 64 cr

About a third of the demat accounts opened under the Rajiv Gandhi Equity Savings Scheme (RGESS) remain empty or without investments in the third year of the scheme’s existence. From NSDL depository data, there were 18,445 RGESS accounts as of February 28. Of these, only 13,771 accounts had investments in them, valued at Rs 64 crore.

The scheme was introduced in 2012-13 to encourage direct investing in the equities market by providing tax breaks. However, the scheme failed to draw investors.

“The product was so structured that it was complicated and has not been understood well by people. It has not taken off and is unlikely to do so,” said Dhirendra Kumar, chief executive officer, Value Research.

The scheme is for tax payers who have never invested in the stock market and have income of less than Rs 12 lakh a year. The scheme has a three-year lock-in but unlike other investments, it allows investors to churn their money after the second year, on the condition that the initial investment amount is maintained. Such investors could claim tax benefit for investing in these schemes under 80 (C) of the Income Tax Act. Those excluded from participation in this scheme are inactive investors with dormant demat accounts.

The scheme can be availed through either direct investing (in scheme-compliant stocks), through a compliant mutual fund scheme or through an exchange traded fund (ETF).

“The industry has failed to get investors under the scheme. Incentives like tax breaks should encourage them to come to the market. There are investors who understand equities as a product but are now staying away because of bad experience in the past,” said the head of a domestic MF house. As the scheme was a pet project of the previous government, further changes to the scheme look unlikely, say industry player.

Total investments in RGESS-compliant demat accounts stood at Rs 64 crore as on February 2015, up from Rs 35 crore in March last year. “As against the first and second year, we did see higher participation in the third year. However, there is still uncertainty about the future of this scheme. There was no talk of extending the benefit of the RGESS to FY16 in the Union Budget,” said Nilesh Sathe, MD&CEO, LIC Nomura Mutual Fund.

The scheme’s three year lock-in period ended on March 31, 2015.

Market participants also said the increase in the value of investments was due to the improvement in the stock market performance. The benchmark indices rose 25 per cent in 2014-15.