Equity savings scheme a dud

Despite incentives to bring new investors into the stock market, RGESS finds very few takers in second year as well

The UPA government's tax-benefit scheme designed to get more investors into the equities market failed to take off in its second year as well. The Rajiv Gandhi Equity Savings Scheme (RGESS), which gives individuals additional tax exemption, got fewer investments during 2013-14 compared to the preceding fiscal, its year of introduction.

The scheme saw investments worth less than Rs 35 crore from less than 6,000 new RGESS-demat accounts during 2013-14, depository data show.

RGESS, introduced by former finance minister Pranab Mukherjee in the 2012-13 Budget, was aimed at boosting the culture of equity investing in the country, where less than two per cent of the population has demat accounts required to make investments in the stock market.

As of March 2014, the two depositories - National Securities Depository (NSDL) and Central Depository Services India - together had a total of 41,301 RGESS demat accounts, with less than half of them having actual investments. Also, around half of these accounts were opened during the first year. (COLD RESPONSE)

"The scheme was structured to flop. It was too complex even for seasoned investors, forget about new ones. To begin with, it shouldn't be restricted to just first-time investors," says Sudip Bandyopadhyay, president, Destimoney Securities.

Notified in November 2012, RGESS provides for 50 per cent tax deduction on investment of up to Rs 50,000 made by 'first-time investors' in select stocks, mutual funds or exchange-traded funds (ETF). The scheme has a three-year lock-in but unlike other investment products allows investors to churn their portfolio or book profits from the second year onwards provided that the initial investment balance is maintained.

"It isn't surprising that the RGESS has got so few takers. It was too complex. Also, there wasn't much push given to it from either the finance ministry or exchanges in the second year," said Nilesh Sathe, chief executive officer, LIC Nomura Mutual Fund.

The scheme has fared badly in the second year despite certain relaxations made by the government. The Centre had raised the income limit for eligibility from Rs 10 lakh to Rs 12 lakh a year. It also allowed investors to invest over a three-year period instead of just one.

Market players say the scheme could have done well had it been easier to understand and operate. The scheme was originally designed to promote direct equity investments but later allowed investments through even mutual funds and ETFs.

Interestingly, the bulk of investments into the scheme came through the mutual fund route, while only less than a fourth came from direct investments into stocks or ETFs.

More than half a dozen fund houses had launched RGESS-oriented new fund offers (NFOs) in recent months.

Prasanth Prabhakaran, president of retail broking at India Infoline (IIFL), blamed volatile market conditions for the lukewarm response to the scheme.

"It is very difficult to get retail participation in equities when the stock market is volatile. In the last two-three years, market conditions haven't been ideal for retail participation. The thought process behind the scheme was right but the timing was wrong," he says. "We need such schemes to promote an equity investment culture in the country as currently only 2 per cent of the population invests in the market," Prabhakaran says. Some market players express doubts over whether the scheme will continue if there is a change in guard at the Centre after the elections.