Rajiv Gandhi Equity Scheme

Rajiv Gandhi equity scheme aims to attract 1.5 cr new investors

SHISHIR SINHA, Business Line 18/3/2012

Investment may be restricted to top 100-200 companies

The Rajiv Gandhi Equity Saving Scheme, announced in this year’s Budget, is eyeing 1.5 crore new investors for the equity market. But, investment under the scheme may be restricted to top 100 or 200 shares on the Bombay and National Stock Exchanges.

A senior Finance Ministry official told Business Line, “Among all the taxpayers, there are nearly 1.5 crore people, with income up to 10 lakh, who do not have a demat account. There would be enough attraction for these people to invest in the equity market.”

The new scheme will allow for income tax deduction of 50 per cent to new retail investors who invest up to Rs 50,000 directly in equities. It will have a lock-in period of three years, and will allow one-time deduction. The scheme is not for existing investors.

The official said that to provide a safer environment, investments under the new scheme may initially be allowed only in the top 100 or 200 companies (on the basis of market capitalisation) listed on various stock exchanges. “Since investors have burnt their fingers mainly in mid-cap, small-cap and penny stocks, it is best to encourage them to invest first in bigger shares. Once they taste profit and feel that their money is safe, they can go for more investments,” he added.

The Economic Affairs Secretary, Mr R. Gopalan, in an interview with Business Line, confirmed that restricting the investment in bigger shares was being considered. A decision in this regard and final details about the scheme were expected by the middle of this year, he added.

Meanwhile, the Finance Ministry is working on a provision for early exit. “For an investor who wants to book profits and exit before completion of the three-year lock-in period, we are thinking of making a provision with a strict condition,” he said. He clarified that under such a provision, the investor may be asked to return the benefit (deduction of Rs 25,000 for calculation of income tax) to the Government.

The new scheme is being designed to encourage flow of savings in financial instruments and improve depth of the domestic capital market.

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Also Read: http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/budget-2012-keeping-mutual-funds-out-of-rajiv-gandhi-scheme-doesnt-make-sense/articleshow/12323461.cms

Also Read: http://www.deccanherald.com/content/234966/rajiv-gandhi-equity-scheme-pep.html

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VRIDHI’s View:

There is nothing great in the budget presented. It lacks vision and stimulus which can bring back the slagging growth on track. But the Rajiv Gandhi Scheme seems interesting. Old timers may remember similar kind of scheme was there earlier and Rajiv Gandhi Equity Scheme does not look too different.

But here are the reasons why it looks interesting:

1. There are around 4 cr demat accounts in India. Assuming just 25% are non replicating we will have 1 cr demat account eligible to invest in RGES. Assuming 50% holders may have income above 10 Lacs we still may have around 50 Lac eligible investors in RGES.

If these people invest then expect a flow of Rs.25000 Crores! (50,00,000 x Rs.50000)

If this flow actually comes in, the money would work like a FII in itself. The best part is it would be for minimum 3 years! The procedural formalities are still awaited. VRIDHI will help you in this.

2. The above article mentions  1.5 Cr new investors may come to invest in the market. If it really happens, it will not only increase the retail participation but would also result in huge inflow into stock market.

Even if 1 Cr new investors come in, expect a flow of Rs.50000 Crores.

If we total up both the above figures, expect a flow of Rs.75000 Crores! It would be great boon for the market if the scheme really takes off. Time will only tell how successful it is.

The best reward for the investors would be if the guidelines are announced immediately since the valuations now are on the lower side we can expect better returns if the money is invested now.

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