By Dhirendra Kumar CEO, Value Research
Back in March (2012), soon after the Union Budget, I had written about the Rajiv Gandhi Equity Scheme that the finance minister had proposed in his Budget speech.
Potential danger signs for investors..!At the time, finance minister Mr. Pranab Mukherjee had not given too much operational details, probably because they were still being worked out. The details are still to be announced, but there are some potential danger signs for investors in what various interested parties have been saying in anticipation of the scheme being launched.
It seems that many share brokers are licking their chops in anticipation of a new crop of fresh, novice clients being delivered to them practically by the central government fiat. There seems to be some sort of a lobbying effort on for a selection of share brokers to be declared as empanelled or authorised to get investors into the Rajiv Gandhi Scheme. Anything like this would be nothing short of disastrous.
Let’s analyse exactly what the finance minister had said on March 16 (2012) while announcing the scheme: “To encourage flow of savings in financial instruments & improve the depth of domestic capital market, it is proposed to introduce a new scheme called 'Rajiv Gandhi Equity Savings Scheme'. The scheme would allow for income tax deduction of 50% to new retail investors, who invest up to Rs. 50,000 directly in equities and whose annual income is below Rs. 10 lakh. The scheme will have a lock-in period of 3 years.”
Two goals..! Let’s see now, there are 2 goals here.
One, to encourage the flow of savings into financial instruments. And two, to improve the depth of the domestic capital market. Please note that, by themselves, neither of these goals necessitates investing directly in equities.
After the goals, let’s look at the modalities. Only those who have never invested before in equities are eligible and the rest of the details are as in the text of the speech.
It goes without saying that the Rajiv Gandhi Scheme will get a decent response - tax rebate schemes always do. For any other type of savings medium, savers eventually learn about how they work. They may make some bad choices the first time they dabble in an asset type but generally learn the basics soon enough.
Once in a lifetime..!The Rajiv Gandhi Equity Scheme is different. It’s available for use only once in a lifetime, and then only to those who have never invested in stocks before. And that means there’s a central government guarantee that everyone who will be investing under it will be an utter novice.
Anyone who understands even a bit of the ground-level reality about how financial distribution (and specially share broking) actually works in India, knows that this scheme is guaranteed to be a disaster.
Believe me, no share broker worth his salt is interested in the tiny sliver of brokerage that a one-time Rs. 50,000 transaction will fetch. This scheme will simply end up being a conduit to attract fresh lambs to the slaughter.
If the officials who are designing the details of the scheme would like it to live up to the goals announced by the finance minister (and to avoid giving a bad name to Mr. Rajiv Gandhi), then they should seriously consider taking most of the discretion out of the scheme.
Best option..!The best option would be to limit to a specific type of conservative MF (mutual fund), such as equity-oriented balanced funds. The scheme should be limited to funds with a long track record, perhaps with all balanced funds older than 5 years being allowed to launch a ‘Rajiv Gandhi Plan’ meant for the scheme.
Most importantly, investors should be forced to invest only through a package of 12 monthly SIP instalments.
Such a structure would be the diametric opposite of people rushing to throw Rs.50,000 on whatever stock a broker wants to push at the end of March every year. It would practically guarantee that a large number of savers would get a taste of equity returns with a minimum of risk.
Potential danger signs for investors..!At the time, finance minister Mr. Pranab Mukherjee had not given too much operational details, probably because they were still being worked out. The details are still to be announced, but there are some potential danger signs for investors in what various interested parties have been saying in anticipation of the scheme being launched.
It seems that many share brokers are licking their chops in anticipation of a new crop of fresh, novice clients being delivered to them practically by the central government fiat. There seems to be some sort of a lobbying effort on for a selection of share brokers to be declared as empanelled or authorised to get investors into the Rajiv Gandhi Scheme. Anything like this would be nothing short of disastrous.
Let’s analyse exactly what the finance minister had said on March 16 (2012) while announcing the scheme: “To encourage flow of savings in financial instruments & improve the depth of domestic capital market, it is proposed to introduce a new scheme called 'Rajiv Gandhi Equity Savings Scheme'. The scheme would allow for income tax deduction of 50% to new retail investors, who invest up to Rs. 50,000 directly in equities and whose annual income is below Rs. 10 lakh. The scheme will have a lock-in period of 3 years.”
Two goals..! Let’s see now, there are 2 goals here.
One, to encourage the flow of savings into financial instruments. And two, to improve the depth of the domestic capital market. Please note that, by themselves, neither of these goals necessitates investing directly in equities.
After the goals, let’s look at the modalities. Only those who have never invested before in equities are eligible and the rest of the details are as in the text of the speech.
It goes without saying that the Rajiv Gandhi Scheme will get a decent response - tax rebate schemes always do. For any other type of savings medium, savers eventually learn about how they work. They may make some bad choices the first time they dabble in an asset type but generally learn the basics soon enough.
Once in a lifetime..!The Rajiv Gandhi Equity Scheme is different. It’s available for use only once in a lifetime, and then only to those who have never invested in stocks before. And that means there’s a central government guarantee that everyone who will be investing under it will be an utter novice.
Anyone who understands even a bit of the ground-level reality about how financial distribution (and specially share broking) actually works in India, knows that this scheme is guaranteed to be a disaster.
Believe me, no share broker worth his salt is interested in the tiny sliver of brokerage that a one-time Rs. 50,000 transaction will fetch. This scheme will simply end up being a conduit to attract fresh lambs to the slaughter.
If the officials who are designing the details of the scheme would like it to live up to the goals announced by the finance minister (and to avoid giving a bad name to Mr. Rajiv Gandhi), then they should seriously consider taking most of the discretion out of the scheme.
Best option..!The best option would be to limit to a specific type of conservative MF (mutual fund), such as equity-oriented balanced funds. The scheme should be limited to funds with a long track record, perhaps with all balanced funds older than 5 years being allowed to launch a ‘Rajiv Gandhi Plan’ meant for the scheme.
Most importantly, investors should be forced to invest only through a package of 12 monthly SIP instalments.
Such a structure would be the diametric opposite of people rushing to throw Rs.50,000 on whatever stock a broker wants to push at the end of March every year. It would practically guarantee that a large number of savers would get a taste of equity returns with a minimum of risk.
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