RGESS Sees Mis-Selling, Illegal Cash Paybacks

Rajiv Gandhi Equity Savings Scheme (RGESS), the government’s pet project to bring retail investors into the stock market, is just a few months old, yet some unscrupulous mutual fund (MF) distributors, with the help of select fund houses, have started offering cash payback as high as Rs 7,000 per Rs 1 lakh of investment in this scheme. The practice of payback, which is illegal, is proliferating because some fund houses are finding it tough to raise money for RGESS plans as the financial year ends in two weeks and there are not enough small investors willing to invest in these schemes. 
    
According to Sebi rules, if an MF scheme can’t garner Rs 10 crore, it should be wound down and all the money be returned to initial investors. Desperate, fund houses are paying distributors as much as 7.5% of what customers invest in RGESS plans, of which up to 7% is being passed on to investors in cash as soon as they sign up. The distributors keep the remaining 0.5% as their commission. 

Interestingly, some fund houses are also offering benefits in kind, one being a trip to Thailand for every Rs 9 lakh worth of RGESS investment, industry sources said. This is how MFs are paying high commissions to distributors: Like in any equity scheme, MFs can charge about 2.5% of the corpus annually to their investors in RGESS plans. Since RGESS plans have a three-year lockin, MFs will charge a total of about 7.5% till the lock-in is lifted. In case the total corpus appreciates, the total cost charged to investors would also increase. 

So funds are dolling out 7.5% upfront to their distributors, hoping to recover this over the lock-in period. However, if the total portfolio value depreciates over these three years, the fund houses will have to bear the losses. Distributors are approaching high networth investors (HNIs) and rich retail investors with the offer of cash payback to lure them into making high-ticket investments. 

Some distributors are making their customers redeem existing investments and transfer funds to RGESS. This, despite the fact that the scheme is aimed mainly at first-time investors who can get up to Rs 25,000 as income tax rebate on an investment of Rs 50,000. Worse, although RGESS is limited to firsttime investors with no prior investment in the stock market, distributors are willing to help even existing investors open a new demat account, at least two people confirmed to INN. 
    
Along with cash payback, some distributors are misselling the scheme, telling unsuspecting investors that it has a government guarantee. On the other hand, the fact that the scheme comes with a three-year lock-in is being suppressed by some distributors.