It doesn't seem to be an easy go for the government to encourage retail participation in the equity markets through its newly launched Rajiv Gandhi Equity Savings Scheme (RGESS). Retail investors and industry insiders seem to be less excited, especially looking at the structure of the scheme, details of which was outlined by the union finance minister P Chidambaram last week.
"The scheme in its present form would fail to attract retail investors, thereby losing its main objective. Restricting participation in the scheme to only the first-time investors is not going to help. Already, retail investors have maintained a distance from the equity markets in the current economic conditions," said Anil Shah, a trading-member director, Bombay Stock Exchange (BSE).
As per the announcement made by finance minister, the RGESS is exclusively for the first time retail investors with annual income of below Rs 10 lakh. Also, the maximum investment permissible is Rs 50,000 per investor and the investor would get a 50 per cent deduction of the amount invested from the taxable income for that year.
However, broker sources have expressed apprehension over the success of the scheme. According to Amar Ranu, AVP - research and advisory, Motilal Oswal Wealth Management Ltd, retail investors are hesitant to enter the equity markets even at the current valuation. "It is seen that the current equity markets rally is backed by foreign institutional investors (FIIs). There is a lack of participation of retail investors. Also, There is no incentive for family-led investors, who operate through demat accounts of their family members. So, there is high dependence on new investors for the scheme to succeed," said Ranu.
He maintained that barring both the capable and seasoned retail investors from the scheme would limit the prospects of the success of the scheme.
"This is going to be a complex scheme to implement. It is unclear about the participation of the normal retail investor. If that restricts them from participating, then there will be no point in having such a scheme. Let us wait for the government notification on the same and let SEBI issue a circular with details on the scheme," said Shah.
According to sources, after the boom time in the initial public offerings (IPO) in 2007-2008, many retail investors including housewives had rushed for opening of demat accounts.
However, global financial crisis gripped the equity markets soon after the collapse of Lehman Brothers. This is believed to have prompted a large number of retail investors exit from the equity markets.
"Tax benefit alone cannot ensure investments under RGESS. It can only facilitate entry of new investors and possibility of good returns alone would attract more investors. So, if new disinvestments IPOs come with attractive valuation and retail investor make money from them, possibly then it would be useful to promote this scheme," said Vaibhav Shah of Monarch Securities - an Ahmedabad-based equity research and broking house.
As per the scheme, investments made in top 100 companies on Bombay Stock Exchange (BSE 100) and CNX 100 as well as public sector enterprises (PSEs) including (Navratnas, Maharatnas and Miniratnas) would be eligible under the scheme.