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. 

  1. 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
  2. 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.  
  3. 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. 
  4. 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. 
  5. 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.
  6. 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. 
  7. 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.  
  8. 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’)


1 decade ago
sir, i am a tamilnadu state govt servant.can i participate in Rajiv Gandhi Equity Savings Scheme or invest in shares .
1 decade ago
what is the main objective of this scheme?dont you think its rsiky for the
first time investors? why this scheme is only for the nw investors?on way its good that locking period three years but i find it little risky also......why this not for the exisiting investors?

Deepak R Khemani
1 decade ago
What should not have been done has been announced, how does a first time investor decide which stocks to buy, when to sell?. EVERY investor in the stock market has learnt the hard way by losing initially that it is not easy to make money in the beginning and here a first time investor is being told to go to the stock market directly!. It should be via a mutual fund only,although as mentioned by some one else in a post below many fund have failed to beat their benchmark!
Krishnaswami CVR
1 decade ago
The reduction in lock in period in tune with long term capital gains exemption is a welcome suggestion. The scheme does not have its objective clear. Whether the Government wants the investors in equity to grow or First time Investors to grow?The scheme can not be a success if only a first time investor. This is to be provided as an incentive to participate in the equity markets. Then only we can expect funds to pour into the markets and disintermediation will accelerate.
nagesh kini
Replied to Krishnaswami CVR comment 1 decade ago
The GOI has reduced the lock in period to one year.
It'll make a lot of sense to take the Rs.50,000 to Rs.5,00,000 and make it 100% deductible and delete the 'first time investor' that is ridiculous.
Gopinath Prabhu
1 decade ago
One of the biggest drawback of this scheme is its 50% deduction. Why would a new investor invest for 50% deduction while he can get 100% deduction by investing in ELSS, that too with a diversified portfolio.

R Nandy
Replied to Gopinath Prabhu comment 1 decade ago
ELSS is within 80C.RGESS is over and above the 1 lac limit under 80C. So totally the exemptions that can be availed are:
(1)1 lac under 80C.
(2)20,000 under 80CCF,if extended again this year.
(3)Self and family medical insurance,80D 30-35,000
(4)25000 under RGESS.

So,with proper planning totally 180,000 exemption can be availed.
Gopinath Prabhu
Replied to R Nandy comment 1 decade ago
Thanks for the clarification.
K M Rao
1 decade ago
Very sensible suggestions indeed to protect the interests of retail investors under the new scheme. Thanks for the info.
1 decade ago
Mis conception is weather the scheme is otherthen 1 lk investment or including that?
R Nandy
1 decade ago
Completely misguided scheme.Many investors will loose money due to ignorance or due to the lockin.The scheme should have been restricted to ETF's or MF.
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