RAJIV GANDHI EQUITY SCHEME---DISASTER IN THE MAKING

Finance Minister Pranab Mukherjee unveiled “Rajiv Gandhi Equity Scheme” (RGES) in his Budget 2012-2013 for first time retail investors. The idea of the scheme was to reduce volatility seen in the recent times and also to broad base the equity markets. The features of the scheme are as under:-

• Only 1^st. time investor entitled to invest
• First time investors will be those who do not have a demat account and having total     income of not more than Rs. 10 lacs.
• Maximum permissible investment—Rs. 50,000/-.
• Deduction allowed @ 50% of investment from Gross total income.
• Investments will be subject to a lock in of 3 years.

 Here’s why we at AIMS believe that the scheme is a disaster in the making?

Firstly, the unveiling of a scheme like this is a pointer to the realization within the government that something is drastically wrong with equity markets and investors. With mutual fund industry shrinking in size (close to 11 lacs folios have been closed in the last financial year while increasing number of AMCs are quitting business etc.) the retail investor has for all purposes left the market—for good. The scheme is expected to bring them back into the equity market. A study done by D Swarup Committee has indicated that India’s investor population has declined from close to 20 million in 1990s to roughly about 8 million in 2009—may also be weighing heavily on FM while announcing a scheme like this.

Wrong logic

Why would an equity investor invest in equity for 3 years for only 50% tax breaks when 100% LTCG are exempt after only 1 year of holding? The better way to promote RGES was through ELSS. Though now there are feelers from the government that the lock in may be reduced to 1 year.

Wrong target audience

RGES benefit will be available only for first time investors. A first time investor is one who does not have a demat account in his name. Rather than let the first time investor access capital market through MFs and or index funds, FM exhorts them to invest directly in equities—is a perfect recipe to further lower the investor count in the country. Surely this is not the way to spread equity culture in the country.

Rather than come up with half-baked initiatives to promote equity cult in the country, government should try to focus on giving investors a taste of equity returns through mutual funds or ETFs. Though the investment is supposed to be made in top 100 companies, there are plenty of ways of having a bad investing experience in Top 100 as well.