In a bid to broad base retail participation in stock markets the Department of Disinvestment (DoD) has suggested tax incentives for small investors to invest in the equity market.
The DoD wants a broad based retail market to be created to get good value for the government stake sale planned in several PSUs.
The department has made a formal proposal for tax incentives to the Department of Economic Affairs (DEA) in the Finance Ministry, a senior official said. “The DoD has said for retail investors to invest in equities there is a need to have some incentive scheme, preferably in the form of a tax incentive,” the official said.
The DoD has been long trying to attract more retail investors into the equity market so that they can own a pie in the government companies as and when PSU stake sales happen.
According to the DoD, a tax incentive would attract retail investors to equities of both public and private companies, widen the retail investor base in the securities markets and ensure financial inclusion.
“Encouraging retail investors would ensure flow of savings into domestic capital markets which would improve its depth,” the official added.
At present, the government reserves 20 per cent of the issue size for retail investors, who are allowed to invest up to Rs. 2 lakh in the Offer for Sale (OFS). Also a 5 per cent discount is offered to them over the bid price.
However the quota reserved for retail investors has not been fully subscribed in some of the big-ticket stake sales like Indian Oil Corp (IOC) and Coal India Ltd (CIL).
Although the biggest ever share sale of Coal India was over-subscribed and the government netted about Rs. 22,600 crore, the retail investor portion remained under-subscribed at 44 per cent.
As much as 12.63 crore shares were reserved for retail buyers but could get bids only for less than half the size (5.56 crore).
As regards the Indian Oil Corporation (IOC) OFS, the portion reserved for retail investors was subscribed 18 per cent of their quota of 4.85 crore shares. The overall issue was oversubscribed 1.18 times with investments from institutional buyers.
Even last week’s Rs. 1,150 crore Initial Public Offering (IPO) of Cafe Coffee Day for retail investor portion subscribed 90 per cent. The issue was otherwise subscribed 1.82 times. As much as 35 per cent of the IPO size is reserved for retail investors.
In order to incentivise equity investment, the UPA government had in 2012-13 Budget announced a tax saving — Rajiv Gandhi Equity Savings Scheme (RGESS) — for first time retail investors. However, the scheme did not generate expected response.