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For mutual funds scrambling to prevent the newly-launched tax-saving Rajiv Gandhi Equity Savings Scheme (RGESS) from being scrapped, farmers and well-heeled investors have turned out to be the knights in shining armour, industry officials say.
As inflows were inadequate, to ensure they meet the regulatory requirement of raising a minimum amount through the new fund offering (NFO), fund houses have had to rely on investors who weren’t eligible for tax benefits on their investments in this equity scheme, shows a Business Standard study co-relating depository data of RGESS accounts with new fund offers launched by fund houses.
The Securities and Exchange Board of India (Sebi) mandates if an NFO fails to garner at least Rs 10 crore, the money collected should be refunded. (MIXED PROSPECTS)
At least six NFOs eligible for tax exemptions under RGESS were launched by mutual funds. This would require them to collect at least Rs 60 crore. However, depository data shows new investors under RGESS accounted for only Rs 34 crore — less than the required Rs 10 crore per fund.
RGESS, introduced by the government last year, allows those who have a gross annual income of up to Rs 10 lakh and invest up to Rs 50,000 in ‘eligible stocks’ to avail of tax benefits. Mutual funds that invested in these eligible stocks were allowed to launch RGESS schemes.
Depository data showed a part of the Rs 34 crore raised so far this year went into existing mutual fund schemes, exchange-traded funds and directly, too — as these routes were RGESS-compliant.
The Association of Mutual Funds in India website shows there are at least ten existing schemes in which investors can put money for a tax break under RGESS, suggesting the total inflows into NFOs are even lower than Rs 34 crore. So far, no mutual fund has announced it was refunding the amount.
Depository and mutual fund sources said some of the money could have come physically or through non-RGESS demat accounts. “Some of the money would have come in through the physical segment. So, it does not show up in the data,” said a senior fund official.
An official at a top fund house said to help meet targets, fund houses could have looked at rich investors. “Sometimes, a high net worth individual is requested to help out in such situations and put some money into the fund,” he said. None of these investors can avail of RGESS tax benefits. According to recent reports, fund houses paid six per cent to sell this product.
“The high commission structure has led to miss-selling or hard-selling of RGESS…In fact, some investors invested amounts greater than Rs 50,000,” he said.
Fund houses did not respond to requests for comments, nor did they deny mis-selling of their funds.
A few fund officials said some funds were index funds or exchange-traded funds, which mimicked popular indices such as the Nifty or the Sensex.
This would mean it had a purpose other than tax-saving — that of a low-cost, passive equity investment vehicle. Investors might have invested for this reason, not for tax purposes, they said.
Unlike available funds of a similar nature available in the market, RGESS schemes have a disadvantage of a lock-in period.
Another distributor said most RGESS collections came from small cities. “The scheme was sold not as a tax-saving scheme, but as a government scheme. In fact, a lot of farmers, too, invested in the scheme,” he said.
