In an effort to further sweeten the Budget proposal aimed at encouraging small investors to put their money into the Rajiv Gandhi Equity Scheme, finance ministry is likely to reduce the prescribed lock-in period from the proposed three years to one year. The changes would form part of the detailed guidelines of the new scheme that are expected to be released by Sebi within a month.
To improve the depth of the domestic capital markets, finance minister Pranab Mukherjee in the Budget introduced the new equity scheme to encourage flow of savings into financial instruments. The scheme allows income-tax deduction of 50% of the total investment made by new retail investors in equities. The investment benefit is capped at R50,000. The benefit is available only once to all individuals with an an annual income below R10 lakh.
The scheme has been proposed with a lock-in period of three years, but senior government official confirmed to FE that the lock-in will be reduced to one year to encourage retail investors. Three years of lock-in is considered long for equity schemes.
There will be safeguards against misuse of the scheme. To check misuse of the tax deduction scheme, which investors can avail benefits recurrently, the ministry will use the National Securities Depository.
The ministry expects to add 6,000-8,000 investors in a year to the equity markets. The total strength of investors in the Indian markets stands at 86 lakh. Experts believe that tax rebates are always the most important driver of investment behaviour so one can expect to the scheme to be popular.
The scheme is expected to come with safeguards that will permit small investors to purchase shares only in the top 100 stocks traded on BSE and NSE.
An exception is, however, expected to be made for public sector companies with the government likely to relax the rule to allow trading in stocks that are part of the top 500 list.
The move is aimed at increasing retail participation in not just the stock market but also in disinvestment exercise.
The scheme allows investors to trade among different stock after one year. The official further clarified that this is a pure equity investment scheme which will not allow investors to avail benefit through the mutual funds equity schemes.
