The thorns and the rose

Govt's new equity scheme may end up like US-64

The government has revealed the nuts and bolts of its much-hyped Rajiv Gandhi Equity Savings Scheme (RGESS), intended to expand the number of first-time investors in the stock market. In these days of liquidity-fuelled euphoria, market participants are prepared to miss the thorns for the rose — which explains the buzz surrounding the scheme. True, too many Indians avoid investing in equity. The finance ministry told Parliament in May that there are 33.73 million income tax assessees. Numbers from the depositories show there are about 20.45 million demat accounts. After cancelling out the duplicate demat accounts, it would be safe to assume that at least half of India’s taxpayers do not invest in equity. That’s a big enough rose. But look at the size of some of the thorns. If your annual taxable income is over Rs 10 lakh, then you are not eligible to invest under this scheme. This means a significant, influential section of taxpayers will be out of this scheme. For a taxpayer whose annual income is between Rs 5 lakh and Rs 10 lakh, and is taxed at the rate of 20 per cent, the scheme offers a maximum saving of Rs 5,000. In the lower bracket – with incomes between Rs 2 lakh and Rs 5 lakh – annual benefits halve in line with the tax rate. Thus, while the big investors are out, the small ones’ incentive is not inspiring. Worse, the scheme will provide a fresh lease of life to another tax-exempted investment route, something the direct taxes code is expected to phase out.

Even more oddly, the investor is forced to put his money in a basket of the government’s choice. This is against the fundamentals of equity investing, since it restricts investors’ choice, even though in a passive manner. The scheme says only investments in the top 100 stocks will be eligible for the rebate. What guarantees that these are the best stocks in which to invest? Market basics are such that even when you buy the right company, you may end up losing money if you buy it at the wrong price.

What expertise does the government have behind it in insisting only on top 100 stocks for a first-time investor, without knowing the price? And who will bear the losses, if any, of this recommendation? What if the 101st company turns out to be a multibagger? The government should have learned the painful lessons of going against equity market principles in the US-64 episode, wherein it offered guaranteed returns on a risk instrument. But it doesn’t seem to have done so — as the RGESS’ problems don’t end here. The investor can invest in companies out of the top 100, if these are state-controlled miniratna or maharatnas, or have a turnover of Rs 4,000 crore or more. Recent government data suggest that many of these companies do not even file their corporate governance reports. If the RGESS winds up as a euphemism for public distribution of the stock market’s bad eggs into the government’s basket, then it will end up as another US-64.