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FM rejects SEBI proposal to route Rajiv Gandhi Equity Savings via MFs

To ensure investor protection, the finance ministry is putting in place safeguards to protect the savings of small investors

May 31, 2012 4:52 IST | India Infoline News Service
It has been quoted in media that the finance ministry has rejected a SEBI (Securities and Exchange Board of India) proposal to market Rajiv Gandhi Equity Savings Scheme (RGESS) through mutual funds. According to the finance ministry, marketing RGESS through mutual funds would rule out the principle of deepening capital markets by attracting new retail investors.

However, SEBI had asked the government to route tax-saving RGESS through mutual fund to minimise risk associated with direct stock investment for new investors. On 19th May, the market regulator submitted a proposal in this regard to the finance ministry. According to SEBI, the first time investors may not have adequate information about the stock market and they should enter the market through institutional investors.

On 31st May, the government, however, said that RGESS was conceived for a different purpose that of expanding India’s capital market culture. To ensure investor protection, the finance ministry is putting in place safeguards to protect the savings of small investors. The cover would ensure that investors are exposed to risks of equity investments in a measured way.

The finance ministry said, since RGESS allows purchase of only BSE-100 and NSE-100 stocks with a lock-in period of three years, it is very unlikely investors will suffer losses on in these bluechip companies. Routing RGESS through mutual funds will defeat the purpose of this tax-free equity savings scheme.

In Budget 2012, for those with less than Rs. 1 million income, a new tax deduction was introduced for direct equity investments. Under the RGESS, investors will be able to claim 50% of their investments in direct equity up to the maximum investment limit of Rs. 50,000. The investment is subject to a lock-in period of three years, similar to the current equity linked saving schemes (ELSS).

The modalities of the scheme are not yet specified, and further details are still awaited. A retail investor can avail the scheme only once in a life time. This is the first-ever tax benefit scheme announced by the government to encourage retail investors participation in the equity market. By offering this scheme, the government aims at channelising household savings into stock markets.

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