Rajiv equity scheme very short on clarity

The government may  hope that the Rajiv Gandhi Equity Savings Scheme (RGESS) could theorectically funnel Rs1.53 lakh crore into the stock market, but its notification last Friday does not quite back such hopes. Instead, the notification raises more questions than it answers.

The scheme offers a tax-break to certain “first-time investors” in the equity market. People whose annual incomes are up to Rs10 lakh can now invest up to Rs50,000 in  blue chips and stocks of public sector companies either directly or through mutual funds, and claim 50% of their investment as a deductible amount from their tax liability.

Finance ministry estimates till March 31 suggest that some 3.06 crore tax-payers could be eligible for the scheme. While 2.88 crore of them fall in the lowest 10% tax bracket,17.88 lakh people fall in the higher 20% tax bracket.

Theoretically, if the estimated 3.06 crore tax-payers invest the maximum permissible Rs50,000 each, a potential Rs1.53 lakh crore could flow into the stock market. For their efforts, they could collectively save Rs8,100 crore in taxes.

But then, that is how far the theory would go. The definition of “first-time investors” remains ambiguous: so, no one knows if all the estimated 3.06 tax-payers  would be eligible for the tax-break.

The scheme is said to be open to only new retail investors “identified on the basis of their PAN” (or permanent account number issued by the income tax department).

This includes those who have “opened a demat account but have not made any transaction in equity and/or in derivatives” yet. What about mutual fund investors who have made their investments without the use of a demat account? Technically, they are not new to the capital markets, and many may have sizable investments. The notification is silent on this apsect.

In 2009, a number of mutual funds  launched schemes focused on stocks of state-owned companies, following the government announcement about disinvestment. Since they invest in “public sector undertakings which are Navratnas, Maharatnas and Miniratnas”, would they qualify automatically for the RGESS, given that  retail investors subscribe to such funds? No one seems to know for sure.

Such funds also have some debt exposure. In some cases, they can invest 35% of their corpus in debt and money market securities. Would this need to be in government paper or debt issued by government companies? Can they invest in debt at all (since the purpose of the RGESS seems to be to encourage equity exposure)? Again, answers remain elusive.

Even outside the universe of public sector undertakings or PSUs, there are at least 47 funds that use the BSE 100 or CNX 100 as the benchmark index. They seem to fit the criterion that investors, to be eligible for the RGESS, should put their money in “stocks listed under the BSE 100 or CNX 100”, though they may also have some exposure outside the benchmark stocks.

So, can these funds lay claim for a tax-break? Well, goes without saying – there are no answers. To be sure, there are some more questions: will the government come out with a list to suggest which of these and the PSU funds are eligible? Or, does it expect the industry to launch a new series of RGESS-compliant funds? Should such funds be closed-ended or open-ended?

DNA spoke to mutual fund industry officials for some clarity. Alas! They, too, were awaiting direction from the government and the market regulator Sebi.

“We are not aware of the details, the operational issues still need to be worked out. I suppose Sebi would initiate talks to iron things out,” said one senior industry expert.

The market regulator is set to issue the relevant circulars to make the scheme effective in the next two weeks.