Reform spree by Government

Buoyed by support from Samajwadi Party (SP) and departure of its most troublesome ally Trinamool Congress (TMC), the Government continued with its reform push with reduction in withholding tax from 20% to 5% and approval of Rajiv Gandhi Equity Saving Scheme (RGESS).  Latest to join the fore is a huge bailout plan for beleaguered state electricity distribution companies, or discoms as they are popularly known. Today we will discuss RGESS and bailout plan for SEB.

Rajiv Gandhi Equity Saving Scheme (RGESS)

The Government of India finally approved the Rajiv Gandhi Equity Saving Scheme (RGESS) with some modifications in a bid to increase equity participation by retail investors in India. One major change in the scheme has been that now it will also be open to investments through mutual funds and exchange traded funds besides direct equity investments.

While the move to allow MF and ETF under the ambit of the scheme is a welcome move, it remains to be seen how much enthusiasm is shown by retail investors as the potential investors of the scheme are people who don’t have prior experience of investing in equity. Also, the scheme lacks novelty factor as tax incentive alone may not be able to bring back retail investors in to the equity markets as evidenced by somewhat disappointing performance of Equity Linked Saving Schemes (ELSS). What remains to be seen is how Government goes about improving sentiments in stock markets as that will eventually determine the success of the scheme.

Bailout for State Electricity Board (SEB)

Another important development was the approval of restructuring of Rs 1.9 lakh crore debt of state electricity boards. As per the scheme, 50 per cent of the short-term outstanding liabilities would be taken over by state governments and balance 50 per cent loans would be restructured by providing moratorium on principle and best possible terms for repayments.

The move came as a big relief for most of the state owned distribution companies and PSU banks which rallied upwards in anticipation of bailout. However, the bailout comes with stringent conditions such as annual tariff revision, conversion of debt by states to equity, three-year transitional finance mechanism (TFC) to provide liquidity support by way of grants only if losses are reduced by at least 25 percent.

While the plan looks good on paper and was essential, its success will depend upon discipline by state governments in implementing the conditions laid out by the plan. One must remember that a somewhat similar plan sans the conditionality was introduced in 2001 as well which failed to resolve the problem of losses due to poor implementation. This time also, when the coalition politics is on a rise, its implementation will remain a challenge as power tariff are determined more by election dates rather than cost of procurement and distribution of power.

What the above measures demonstrate is the intent of the Government to bring the economy back on track. While some of them may not lead to desired outcome, it’s the sense of purpose of Government which is viewed positively by investors and has resulted in impressive gains from stock markets. As long as this intent is there, dare we say better times are ahead for financial markets.

By Rajat Gupta – Research Analyst – Concept Securities Private Limited