UPA's dud, the Rajiv Gandhi Equity Scheme, is awaiting a quiet burial

One of the dangers of naming schemes after your party’s revered leaders is that if the scheme flops, you cannot abandon it quickly. You keep trying to keep it going harder and harder without anyone whispering “RIP”.

The Rajiv Gandhi Equity Savings Scheme (RGESS) is a stretcher case, but the Congress party – which introduced it in the 2012-13 UPA budget, refused to let go despite a change in finance ministers.

When Pranab Mukherjee was Finance Minister, he announced the scheme to entice new investors into equity. He said in his 2012 budget speech: “To encourage flow of savings in financial instruments and improve the depth of (the) 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 percent to new retail investors, who invest up to Rs 50,000 directly in equities and whose annual income is below Rs 10 lakh. The scheme will have a lock-in period of three years. The details will be announced in due course.”

Firstpost pronounced RGESS as DOA – dead on arrival. It didn’t take off.

Mukherjee’s successor, P Chidambaram, tried again valiantly in the next budget, despite his normal disdain for fixing the things left behind by Mukherjee. He said “the Rajiv Gandhi Equity Savings Scheme will be liberalised to enable the first time investor to invest in mutual funds as well as listed shares and she can do so, not in one year alone, but in three successive years. The income limit will be raised from Rs 10 lakh to Rs 12 lakh.”

It still didn’t work, for the concept was simply too complicated for first-time investors to be attracted to it.

According to a BusinessLine report today (13 January), the scheme has garnered all of Rs 120 crore in the three years since it was announced. It has slightly more than 46,000 investors. Not exactly the kind of volume that would have deepened the domestic equity market.

The reasons why we thought the scheme would never fly were apparent right from the outset. As Firstpost wrote at that time, it was designed for the first-time investor, which meant creating filters for keeping existing investors in stocks out.

The first-time investor, as defined then , would need to open a demat account and should also not have dabbled in derivatives. In its first avatar, the scheme said you could invest in “stocks listed under the BSE 100 or CNX 100, or those of public sector undertakings which were Navratnas, Maharatnas and Miniratnas” or their follow-on offers. Since losers like MTNL were also labelled as Navratnas, the list did not automatically guide first-timers to profitable companies. How a newbie investor was supposed to find the right stock so that he did not make a mistake nobody knew. If he burned his fingers, RGESS would have turned him off stocks for good.

But the scheme had enough other turnoffs. The biggest deterrent was the three-year lock-in for the scheme that was really a more complicated one-year lock-in. You could sell your share/shares after one year, but you had to reinvest the initial amount (for which you claimed a tax deduction) back by buying from the same select list of shares.

But there were further complications. If, say, you bought shares worth Rs 50,000 and next year you sold it for Rs 25,000 (a loss of Rs 25,000) you have to invest only Rs 25,000. That is, even after a loss, you are invited to put more money in stocks with what you have managed to salvage by cashing out. If you made a profit (say, if you sold it for Rs 60,000), you have to invest only Rs 50,000. You can’t put the whole amount in your bank FD, only Rs 10,000. Worse, you had to maintain the initial value of the investment (Rs 50,000 in our example) for at least 270 days in years two and three.

Another complication was that you could invest Rs 50,000 in several smaller doses – but at the cost of maintaining complex calculations on lock-in that varied for each bit of investment separately.

In 2013, the scheme was “liberalised” by Chidambaram, but as the numbers show, the investing public was not amused.

The real foolishness is this: when there is already a fairly uncomplicated Equity Linked Savings Schemes (ELSS) that offered 100 percent tax deductions upto Rs 1,00,000 (of course, along with other investments in PF, insurance policies, etc), what was the point in offering another scheme with 50 percent deduction for first-timers? And remember, ELSS can be used every year, unlike RGESS. Wouldn’t it have made more sense to popularize ELSS for first-time users?

RGESS was UPA’s answer to something the investor never asked for. The only thing to do is to give the scheme a quiet burial. Arun Jaitley almost did that by not even mentioning the scheme and its fate in his last budget.