Missing the Buzz

We discuss complexities that are preventing the RGESS from catching on with retail investors.
Dipak Mondal/Money Today        Print Edition: January 2014
Why RGESS has not gained currency among retail investors

It has all the trappings of a government welfare scheme-the name, tedious rules and, not to forget, complex procedures. The Rajiv Gandhi Equity Savings Scheme, or RGESS, launched last financial year, was the government's attempt to encourage small investors to buy equities by giving them tax breaks.

Like many government schemes, while the intention was right, the execution was not. The scheme has failed to bring retail investors to the equity market in large numbers despite the promotion and awareness campaigns launched by the government and mutual fund houses .

The RGESS, which offers tax deduction up to Rs 25,000 a year over and above the Rs 1 lakh exemption under Section 80C, had managed to collect just Rs 63 crore (valued at actual acquisition cost) as on September 30, according to data from the two depositories, NSDL and CDSL.

{Note: This is the amount eligible for the tax benefit. However, RGESS schemes launched by fund houses have collected more money than is eligible for RGESS benefits. Six fund houses launched RGESS schemes (close-ended funds) early this year and together collected over Rs 200 crore}.

The buzz is missing in the current financial year as well. Even as the tax-saving season is about to begin in a couple of months, mutual funds, which accounted for almost 85% collection last year, are not too buoyant about the scheme. Neither are the distributors of financial products.

LIC Nomura Mutual Fund, whose RGESS product collected around Rs 15 crore last year, will launch another such fund by December this year. However, Chief Executive Officer Nilesh Sathe says it's not that there is too much interest in the scheme. He says since they launched an RGESS product last year, they had to offer investors a window to invest in the scheme this year as well (now one can claim tax deduction for three years as against the earlier limit of one year).

Debashish Mallick, CEO, IDBI Mutual Fund, says they do not intend to launch any new RGESS fund this financial year as long as some issues are not resolved. IDBI Mutual Fund's RGESS fund had collected Rs 17 crore last year.

Another reason fund houses are not keen to launch new funds under the RGESS is that many existing schemes-Nifty and Sensex-based index funds-are RGESS-compliant. So, new investments can be channelled through these funds as well.

"Those who launched new funds got negative press for allegedly paying high upfront commissions," says Surjit Misra, executive VP and head of MF Group, Bajaj Capital.

Mutual fund houses were reportedly paying up to 6% commission to distributors for selling their RGESS funds. However, fund houses justify such high commissions saying that distributors only receive one-time commission (no trail commission) in schemes with lock-in periods.

COMPLEXITIES GALORE

Let us discuss some issues that Mallick of IDBI Mutual Fund and others have been raising for a while now.

Eligibility criteria:

Tax benefit under the RGESS is only for firsttime equity investors-those who did not hold equities or derivatives in demat form before 23 November 2012. However, if one is eligible, the benefits can be availed of for two more years. Also, anyone with more than Rs 12 lakh annual income is not eligible. These conditions, says experts, are a constraint for investors as well as distributors and fund houses. These not only limit the number of investors but also make it tough for distributors to identify the eligible investors.

Take people opting for ESOPs. They may be holding these stocks through their demat accounts but will not be eligible for the RGESS benefits.

"Identifying eligible customers is a problem. First, we have to find investors interested in the scheme. Then we have to see that they are first-time equity investors and their income is not more than Rs 12 lakh. If the investor is not eligible on any of these two accounts, our efforts go in vain," says Mallick of IDBI Mutual Fund.

Mandatory demat requirement:
One of the key requirements for availing of tax benefits under the scheme is that the investment has to be in demat form. This means having a demat account is a must. This is a big impediment for investors as opening a demat account is tedious.

Besides, as is clear from last year, most investors are entering the scheme through mutual funds and mutual fund agents-mostly independent financial planners- are not depository participants, or DPs, who can undertake the demat process on their own.

Quote

WE ARE NOT GOING TO LAUNCH ANY SPECIAL RGESS FUND THIS FINANCIAL YEAR AS LONG AS SOME EXISTING ISSUES ARE NOT RESOLVED

Debashish Mallick

CEO, IDBI Mutual Fund

This means the investor has to go to another intermediary (DP) for opening a demat account and go through the long procedure to comply with the know-your-customer, or KYC, norms. Even mutual fund investments under the RGESS have to be in demat form.

However, if a person has been investing in equity mutual funds but does not hold the units in demat form, he will be eligible for the benefits if he fulfills the other criteria.

Multiple declarations:
Opening a demat account is not the end of the hassles. You also have to declare that you want your investments through the account to be considered for the scheme's benefits. For that, you have to fill Form A, which you can get from the DP.

You can invest any amount in such an account, but the tax benefit will be available only up to Rs 50,000. You have to, therefore, submit Form B to the DP if you wish to keep some securities outside the RGESS ambit.

Flexible lock-in:
All investments for saving tax have a lock-in period. The RGESS, too, requires the investor to keep the amount on which the tax benefit has been claimed invested for three years. However, the RGESS has the concept of fixed and flexible lock-in periods. During the first year or the period of fixed lock-in, the investor cannot sell any holding. From second year (flexible lock-in), he can sell a part of the holding provided he maintains in his account the amount on which he has claimed the tax benefit or the value of the RGESS portfolio before the sale, whichever is less. He has to maintain this amount in his account for at least 270 days a year for the next two years.

Quote

WE WILL LAUNCH AN RGESS FUND BY DECEMBER TO OFFER EXISTING INVESTORS A WINDOW TO AVAIL OF THE TAX BENEFITS THIS YEAR AS WELL

Nilesh Sathe

CEO, LIC Nomura Mutual Fund

Consider a situation where your initial investment of Rs 50,000 rises to Rs 80,000 after the end of the fixed lock-in period. In such a case, you can sell Rs 30,000 worth of securities and maintain Rs 50,000 in the account for at least 270 days a year for the next two years.

However, what if the value of the securities falls to Rs 40,000 after the first year? You can still sell a part of your holdings provided you replenish the amount. So, if you sell shares worth Rs 10,000, you have to invest at least this amount again. However, if the markets go up and your portfolio value touches Rs 38,000, then you need to bring back only Rs 2,000. If the investment grows to Rs 40,000, there is no need to invest any money. In another case, if Rs 30,000 falls further to Rs 28,000, you still have to re-invest only Rs 10,000.

You will be saved these hassles and calculations if you do not sell the securities during the flexible lock-in period.

AS SIMPLE AS...

Compare the RGESS norms to those of equity-linked savings schemes (ELSS) of mutual funds, investments in which are eligible for tax deduction under Section 80 C.

Any adult who is an Indian resident can invest in ELSS funds and avail of tax deduction up to Rs 1 lakh. He need not be a first-time equity investor. He also does not have to keep his holdings in a demat account. Besides, the rules regarding the lock-in period are simple. Each instalment has to be locked-in for three years. One cannot redeem the investment but can opt for the dividend option.

INVESTORS IN QUANDARY

Quote

THE SCHEMES LAUNCHED BY MUTUAL FUNDS LAST YEAR GOT A LOT OF NEGATIVE PRESS ON THE ISSUE OF COMMISSIONS PAID TO DISTRIBUTORS

Surjit Misra

Executive VP, Bajaj Capital

For investors, it is a question of taking a lot of pain for little gain. Under the scheme, one can claim a maximum of Rs 25,000 tax deduction (save only up to Rs 7,725 in the 30% tax bracket).

No wonder investor interest is minimal. But awareness is not an issue, says Mallick of IDBI Mutual Fund. "Earlier this year, when the scheme was launched, the government, Sebi (Securities and Exchange Board of India) and fund houses created a lot of buzz about it," he says.

Jitendra Solanki, a New Delhibased financial planner, says, "Most of my clients have annual income of Rs 10 lakh and above. Last year, they were not eligible. Though this year individuals with annual income up to Rs 12 lakh can avail of the scheme's benefits, the tax saved is too little."

However, some feel that the decision to allow investors to avail of benefits for three years instead of one year, and increasing the income limit from Rs 10 lakh to Rs 12 lakh will attract more people to the scheme this year.


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