After a lot of debate over what instruments should be made available for investing in the Rajiv Gandhi Equity Savings Schemes, the Securities and Exchange Board of India (SEBI) finally pronounced norms and clarified (vide a recent circular), which securities will be eligible for participation in the said scheme. It is clarified that the following securities would be considered eligible for RGESS.
 

• Close-ended mutual funds (which are traded and listed on stock exchanges);
• Exchange Traded Funds (ETFs) (barring gold ETFs);
• Equity shares of:
   
  • BSE-100
  • CNX-100
  • Maharatna, Navaratna and Miniratna Public Sector Undertakings (PSUs) - including their Follow-on Public Offers (FPOs)
  • IPOs of PSUs with Government stake not less than 51%, having revenue of Rs 4,000 crore in the last three years
  
   

Moreover, in case of shares as investors in RGESS, you have an option to exercise your choice in case of two corporate actions - i.e. rights issue and buy-back of shares.

The aforesaid eligible securities under RGESS will have a mandatory (i.e. fixed) lock-in period of 1 year and a flexible lock-in period of 2 years. Thus while you invest in the aforesaid scheme you got to distinctly specify your lock-in; and in case if you do not specify, the mandatory lock-in period will apply. Also, the Government in its notification has permitted a a grace period of three trading days from the end of the financial year so that the eligible securities purchased on the last trading day of the financial year also get credited in the demat account and such securities shall be deemed to have been purchased in the financial year itself. However, the deduction claimed will be withdrawn if the lock-in period requirements of the investment are not complied with or any other condition of the scheme is violated.

It is noteworthy that the key feature of the RGESS scheme is that it provides a 50% tax rebate to new retail investors who invest upto Rs 50,000 in the aforesaid eligible securities and whose annual income is below Rs 10 lakh. RGESS has an overall lock-in period of 3 years, but investors are allowed to sell / pledge / hypothecate their securities after the expiry of the mandatory lock-in period (i.e. 1 year). The period after the end of the mandatory lock-in period, which is called as the flexible lock-in period can be used to trade in the eligible securities provided you as a new retail investor ensure that the demat account under the said scheme is compliant for a cumulative period of a minimum of 270 days during each of the two years of the flexible lock-in period. It is noteworthy that for investments in installments, 1 year mandatory lock-in and 2 years flexible lock-in would be determined from the date of the last installment.

One may wonder who's a new or a first time investor. Well, the onus is on the depositories to certify that an investor is a first timer. They have the power to seek information from exchanges on investor transactions (trade value, trading date and settlement number) through their RGESS designated demat account. It is noteworthy that a new retail investor's demat account created under the Scheme shall, on the expiry of the period of holding of the investment, be converted automatically into an ordinary demat account.

We are of the view that by issuing a detailed clarification, SEBI has set a structure for investors to invest in RGESS. Also by including close-ended mutual fund schemes in the list of eligible securities, an attempt is made to encourage long-term holding and refrain churning. But we think that full access to mutual fund investments under RGESS may have helped novice investors to benefit from the equity asset class in a better and larger way. Speaking about stocks for RGESS, while inclusion of Maharatna, Navaratna and Miniratna PSUs (including their FPOs) and IPO of other PSUs may appear safe to many, we think that they could restrict wealth generating potential for novice investors.

Nonetheless, RGESS would aid in generating flow of savings in the Indian capital markets, which in turn would add depth for the markets.

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