Govt plans change in retail stock scheme


Mumbai: The government is planning to change the contours of a stock market investment scheme announced in the national budget that would qualify for income-tax (I-T) rebates.
Instead of retail investors putting money directly in equities, as the budget proposed, the government may ask them to invest through mutual funds as they do not fully understand the risks, a person familiar with the development said. If at all, they may be allowed direct investment only in listed public sector firms, he said.
The new scheme, christened the Rajiv Gandhi Equity Savings Scheme, was proposed to boost the flow of financial instruments and add depth to the capital market. It offers an I-T deduction of 50% for investments up to Rs 50,000 by new retail investors whose annual income is below Rs 10 lakh. The scheme has a lock-in period of three years.
The maximum benefit a taxpayer will get is Rs 5,000 as investors with an annual income of Rs 10 lakh typically pay around 20% income tax.
“New investors should not be allowed to invest in stocks directly as they don’t understand the risks. The ministry is tweaking the proposal,” the person said. “First-time investors are likely to be asked to invest through mutual funds. A portion of it could be direct investment, but only in listed public sector firms.”
He declined to be named as the likely change in the budget proposal is not yet in the public domain and finance minister Pranab Mukherjee is expected to announce it on 7 May.
India’s stock markets regulator had expressed strong reservations to Mukherjee about the budget proposal in its current form. The matter came up for discussion when Mukherjee addressed the Securities and Exchange Board of India (Sebi) after the budget was announced in Parliament on 16 March.
India’s finance minister traditionally addresses the boards of the Reserve Bank of India (RBI) and Sebi after every budget.
The rationale behind allowing retail investors to invest directly in public sector enterprises is to broadbase the holding pattern of such firms, which the government has all along been insisting on. Besides, these stocks are less prone to price manipulations, a Sebi official pointed out. He, too, declined to be identified.
There are 82 listed state-owned firms and the government holding in these ranges between 16.27% and 99.59%. BSE’s index for public sector units in the last one year has lost 21.53%, even as the exchange’s benchmark equity index, the Sensex, lost 10.91%. Since January, the gauge has risen 13.01%, while the Sensex’s gain has been 11.21%.
The average price-earnings (P-E) multiple of these 82 firms is 9.23 and that of the entire universe of listed firms is 14.63.
In stock trading, the P-E multiple of a stock is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. A higher P-E multiple means investors are paying more for each unit of net income, so the stock is more expensive compared with one with a lower P-E multiple. A high P-E suggests investors are expecting higher earnings growth in the future compared with companies with a lower P-E multiple.
Market experts say first-time retail investors should also be allowed to invest in exchange-traded funds (ETFs). Managed by professional fund managers, an ETF is a security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.
Typically, the ministry consults the respective regulators before making any budget proposals that concern them, but it doesn’t always do so. For instance, in February 2010, Mukherjee had announced opening up the banking sector for a new set of private entities; RBI was not consulted but merely informed about the plan a few days before the presentation of the budget.
In the case of retail investment in the stock market, Sebi was not consulted.

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