Rajiv Gandhi Equity Savings Scheme: How to make the best of a good or bad bargain?
Rajiv Gandhi Equity Savings scheme may have a laudable objective; it is the responsibility of the government to ensure that the ordinary investors, whose financial literacy is at a low ebb, are protected to the maximum extent to ensure success of the scheme
In the Budget 2012-13, finance minister Pranab Mukherjee announced a new scheme called Rajiv Gandhi Equity Savings Scheme “to encourage flow of savings in financial instruments and improve the depth of the domestic capital market”. Though there are both positive and negative views on this subject depending on which side of the fence you are, at this stage there is no merit in debating whether it is a wise decision or not to have such a scheme to tempt the ordinary middle class to dabble into the stock market through tax incentives, as it is already a fait accompli and the government is in the process of finalising the contours of the scheme. As per press reports, the scheme is under formulation and will be ready within the next one month. So this is the right time to give suitable suggestions to make it as investor-friendly as possible and make the best of a good or bad bargain.
The scheme as announced by the finance minister is meant for individual investors with an annual income of below Rs10 lakh and who invest up to Rs50,000 in stocks listed on the recognised stock exchanges in our country. Such investors will get a 50% tax deduction in the year in which they make the investment provided they retain that investment for a minimum period of three years, as it has a lock-in period of three years. This obviously means that if you sell these shares within the lock-in period, it might be added back to your income in the year in which you sell these shares. However, this benefit is available only once in a life time and may not be repeated in future.
In the interest of orderly implementation of the scheme and to ensure its success, it is desirable to have complete clarity on the scheme and following suggestions are worth considering to make it really worthwhile for the common man, who may be tempted to enter this den of speculation for the first time in his life, to avail of the tax benefit so generously granted by the finance minister.
- The investor population has been falling for the last several years. If this scheme is to encourage investment in stock market, then it should be made available to all those who invest in the stock market, whether they are first time investors or not, as it may help in bringing back of those investors who had invested in the past, but have retired hurt, may be due to the loss incurred by them, or for whatever reasons
- In the case of shares, if they are held for more than a year, the investment is considered as long-term and no capital gains tax is levied on such income arising out of the shares sold through the recognised stock exchanges and on which securities transaction tax (STT) is paid. Hence it is desirable to restrict the lock-in period to one year to synchronize with the concept of long-term holding period stipulated in the Act.
- At the end of the lock-in period if the investor sells these shares and makes a loss on the investment, there should be a provision to offset this loss against any other income including salary income of the investor in the year of sale, so that the investor does not lose money by participating in this scheme.
- If the investor is unable to sell the shares at the end of the lock-in period due to the company declaring bankruptcy, or if the company is delisted from the stock exchange, the investor should be given the benefit of writing off this investment as a loss against his other income, including salary income, so that the investor does not suffer for long. This benefit may be made available for a period of five years from the date of first investment.
- If the investor sells these shares within the lock-in period, he/she should add the original investment back into his/her income and pay tax on that amount in the normal course to comply with the concept of lock-in period.
- The scheme should be made applicable for all investments made either through the primary market, i.e. initial public offerings (IPOs) or through the secondary market to provide enough flexibility for the investor.
- At present loss-making companies are allowed to come out with IPOs and investors may fall a prey to the persuading powers of the brokers, and invest in such offers, resulting in taking undue risk, which is not desirable for the first-time investors. The Securities and Exchange Board of India (SEBI) should therefore, permit only those companies which are making profits for a continuous period of three years to enter the market with a public offer, thereby safeguarding the interest of the investors at least in future.
- There are a number of companies which came out with public issues in the past promising to list the company in the stock market within the stipulated period, but subsequently for one reason or other, they have failed to list the shares, putting the investors into deep trouble. In future, SEBI should make it a condition for all companies while permitting IPOs, that the promoters of such companies who fail to get the shares listed within the stipulated time frame to repurchase the shares from the investors at the issue price with interest at the prescribed rate to help those investors who would like to get rid of such shares.
While it is easy to encourage the common man to invest in the stock market by offering baits like tax incentives, in a country like India, where financial literacy is at a low ebb, it is the responsibility of the government to ensure that the investors are not taken for a ride either by the companies or by the market intermediaries. These are, therefore, some of the suggestions for the consideration of the finance minister, who should ensure that the investors are protected to the maximum extent and the good intentions of the scheme are not frustrated by its misuse by unscrupulous people in the financial market.
(The author is a banking and financial analyst. He writes for Moneylife under the pen-name ‘Gurpur’)
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