Govt woos retail investors, offers ECB fillip to companies

The government on Friday continued with its reforms push by announcing two major initiatives. It approved the Rajiv Gandhi Equity Saving Scheme (RGESS) for first-time retail investors.

To remove bottlenecks for companies in accessing cheaper foreign loans quickly, the finance ministry also lowered withholding tax on foreign borrowings from 20% to 5%.

Finance minister Palaniappan Chidambaram approved a new tax-saving scheme for retail investors. The scheme would give benefits to new investors who invest up to Rs50,000 in approved securities directly or through mutual funds (MFs) and exchange traded funds (ETFs) which in turn invest in eligible securities.

Eligible securities include stocks listed under the BSE 100 or CNX 100, or those of public sector undertakings (PSUs, or state-owned companies) having labels of Navratna, Maharatna or Miniratna.
Follow-on public offers (FPOs) of such state companies and initial public offerings of PSUs with annual turnover of more than Rs4,000 crore are also eligible.

Under this scheme, first-time investors with annual income of less than or equal to Rs10 lakh, who have not made any equity transaction in the past, would get a 50% deduction of the amount invested from taxable income for that year.

Sundeep Sikka, CEO of Reliance Capital Asset Management, believes the government initiatives would help expand Indian capital markets.

”It would encourage new investors to come into equity markets. There are enough mutual fund schemes which would qualify for the RGESS. Even if there are schemes which do not qualify for the RGESS, these operational requirements can be met,” he said.

Only ETFs and MFs that have RGESS-eligible securities have been brought under the RGESS.

The scheme also offers flexibility to investors to book profits partially. Though the total lock-in period requirement is three years, an investor can trade in securities after the first year, provided the investor purchases the RGESS-compliant securities of at least the same value subsequently.

As for the lower tax on foreign borrowings of corporates, the amendment to the Income Tax Act 1961 will mean that the interest income of a non-resident investor will be taxed and withheld at the reduced rate of 5% instead of the existing 20%.

“With a view to lower the compliance burden and reduce the time lag which would arise on account of case-by-case approval, borrowings under a loan agreement or by way of issue of long-term infrastructure bonds that comply with external commercial borrowings (ECB) regulations as administered by the Reserve Bank of India (RBI), would be eligible for availing of the benefit of this concessional tax regime without the need of specific approval,” the finance ministry notification stated.

Samir Kanabar, tax partner at Ernst & Young, believes that streamlining the administrative process will save a lot of time for companies because earlier it used to take 3-6 months for them to get government approval.

“If a company is complying with the ECB guidelines laid down by regulator RBI, then there is no need to get another approval and such companies can now quickly access foreign funds,” he said.
Sanjay Sinha, founder of Citrus Advisors, believes the move will be a big shot in the arm for capital-starved infrastructure companies. Easier foreign borrowings will lighten their burden with respect to interest paid and improve their financials, he said.