The Rajiv Gandhi Equity Savings Scheme (RGESS) which was announced in the Union Budget in March 2012 has been notified. The government has announced the details of the scheme.

The salient features of the same are as follows: –

Investors who have till date neither invested or traded in equity or derivatives and having taxable income of below 10 lacs are eligible. The tracking points would be PAN card and Demat account. The investment may be made in shares of the BSE100 or CNX100. Further shares of PSU companies which are Navratnas, Maharatnas or Miniratnas are also included. The scheme would also apply for IPO’s, FPO’s of PSU companies going public and having a turnover greater than Rs 4,000 crs for the last three years. Investments in eligible companies could be in the form of equity, ETF and mutual funds.

Investments of upto Rs 50,000 would be eligible for a 50% tax break implying a reduction in taxable income of Rs 25,000. The operating details are that investments made in the beginning would have a lock-in for one year and after the initial period, trading and switching would be permitted as long as the money remains invested in the scheme for a period of two years making the total length of the scheme three years.

The intention of the scheme is on paper good with the idea being to inculcate savings and investments in equity and equity linked schemes. The paperwork involved and the kind of effort one would have to go through may make the same difficult to operate. With just one mutual fund offering an eligible scheme under CNX100 currently one would see a large number of fund houses offering schemes on these indices. Mutual funds would have to take the initiative in launching products and also extensively marketing the same to attract first time investors.

There was till last year a product known as infra bonds where the principle invested was tax deductible under section 80CCF. This instrument allowed deduction of tax on the principle upto Rs 20,000 and was in existence for two years. The scheme did not do well as people found the value of Rs 20,000 to less and there were talks of increasing the value to Rs 50,000 to make it economical to operate. Institutions who launched these schemes felt that it was difficult to service investors and the cost of operation and servicing clients was expensive. The RGESS is a onetime scheme for investors and benefit can be taken only once in a lifetime. One hopes that the fate of the scheme does not land up eventually like 80CCF infra bonds.

Secondly there is a concept being floated around in the Ministry of Divestment about an ETF which would help divestment and that such an ETF would trade at a premium to its NAV. One only hopes that inclusion of ETF for the RGESS is not as a fall out of this thought which seems flawed. Globally ETF’s track the NAV and trade at a discount to the underlying and to expect that logic in India would change at the stock market would be unpalatable.

Good thought, operationally difficult to manage but provides ample opportunity to mutual funds to step in and educate first time investors and potential target audience for the RGESS scheme.