Rajiv Gandhi Equity Savings Scheme: Boon or Disaster for Small Investors?

As an investor, the only thing of interest in the latest Budget was the Finance Minister’s announcement of the Rajiv Gandhi Equity Savings Scheme (RGESS).

Here’s what the FM said on the scheme in his Budget speech…

To encourage flow of savings in financial instruments and 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 10 lakh. The scheme will have a lock-in period of 3 years.

When I multiply Rs 50,000 per person with around 1.5 crore people with annual income up to Rs 10 lakh and who do not have a demat account as of now, I get to a potential Rs 75,000 crore of fresh money that could flow to the Indian equity markets in the first year of this scheme.

This works to just around 1.2% of the current market cap of BSE. Even if you take Sensex’s market cap as the denominator, this is just around 2.6%.

So, the “depth” that the FM wants to create through the RGESS by bringing in a new set of investors doesn’t seem possible through the RGESS.

Instead, what I believe the RGESS could do is throw 1.5 crore new investors plus speculators into the game of equity investing that’s very dangerous when you enter with loads of money but zero experience or knowledge.

Given that this is a ‘tax-saving’ scheme, and knowing how people treat such schemes, most would end up spending their Rs 50,000 ammunition at the far end of the financial year, when their CA would remind them that they need to invest so much to save so much tax.

So most of the new people to benefit from the scheme would end up buying stocks without much knowledge of the loss they can incur but just lured by the tax they can save.

Also, since the RGESS targets just direct investments into equities and not through the mutual fund route (at least this is what it seems as of now), it will ultimately become a hotbed for brokers and other financial intermediaries to ‘sell’ junk stocks to naive investors in the name of “Listen to me and I’ll not just help you save tax but also help you double your money in 3 years”.

To me, the RGESS would not solve any purpose for a large majority of people who invest or are looking to invest in stock market.

In the name of ‘tax-saving’, it would only lead people to commit mistakes that they cannot overturn for the next 3 years.

For smart investors, well, the tax-saving carrot is anyways meaningless as compared to the gains they have been making by…

• Investing systematically
• Investing based on their own, independent knowledge
• Investing in good quality stocks
• Investing in good quality mutual funds

Some experts are saying that the money RGESS is capable of bringing into the stock market (Rs 75,000 crore as we calculated above) is of the same scale as FII inflows into India. Of course, this is true!

But what is also true is that without the knowledge of what their Rs 50,000 would buy, and without having any chance to reverse their mistakes by selling bad stocks before the 3-year lock-in period, the RGESS could lay the ground for a massive wealth destruction for small investors.

In the form of investor education and protection from greedy financial advisors, the small investor in India wants a safety net first, Mr. FM. The ‘depth’ where he can dive into can be created later!

The only beneficiaries of the RGESS will be the government (which will collect a lot in the form of securities transaction tax) and the financial intermediaries (for the reasons I mentioned above).

As a small investor, if I think I will benefit even a bit from this scheme, I will be the biggest April Fool…and that too in March! 🙂