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The Indian stock market has attained a fair degree of maturity under the aegis of the regulator Securities and Exchange Board of India (Sebi). It has always been a concern of the government and Sebi to protect the retail investor and to make the market as granular as possible.
The scope of the Rajiv Gandhi Equity Savings Scheme (RGESS) has been widened in the recent budget. RGESS, crafted with the stated objective of 'encouraging the savings of small investors in the domestic capital market', basically entitles a 'new investor' to tax benefit in the equity shares of Maharatna, Navratna or Miniratna (collectively, 'Ratnas') companies, equities constituting two specified indices namely BSE100 and CNX100, units of designated Mutual Fund Schemes and primary issues of certain Public Sector Undertakings.
The Ratna stocks and other PSU stocks appear to have been dovetailed with index stocks and MF units, presumably to widen the spectrum of investment options. While there is nothing wrong in extending tax sops for certain specified investments, a conundrum of multi-dimensional legal conflicts lie below the subtle economics of tax incentives provided for investment in Ratna and PSU stocks.
'Dominant position' under the Competition Act 2002, means a position of strength enjoyed by an enterprise in the relevant market which enables it to operate independently of competitive forces, or affect its competitors or consumers in its favour. As far as the bourses are concerned, the government does qualify to be an enterprise enjoying a dominant position. The fact that the government has inherent powers to remove a member of Sebi from office, compounds the government's position of dominance.
There shall be an abuse of dominant position if an enterprise indulges in a practice resulting in the denial of market access (Section 4 of the Competition Act).
This phenomenon is known as 'Essential Facility Doctrine' (EFD). The three major tests of EFD are
(i) the facility must be controlled by a dominant enterprise in the relevant market (the relevant market is the 'Capital Market'; taxation and tax incentives are controlled by the 'enterprise' called government),
(ii) competing enterprises should lack a realistic ability to reproduce the facility, (other enterprises in the private sector do not have any realistic ability to provide any tax incentive)
(iii) access to the facility is necessary in order to compete in the relevant market; and it must be feasible to provide access to the facility (competing enterprises do not have access to the taxation regime; neither is it feasible for the law to provide them with any access to taxation, and incentives thereof).
Further, there shall also be an abuse of dominant position if an enterprise concludes contracts that are subject to acceptance of supplementary obligations which have no connection with the subject of such contracts. RGESS is a scheme by which the promoter of a company causes conclusion of contract (eg. subscription in IPOs of specified PSUs, primarily a securities contract) between it and the investor subject to supplementary obligations (like lock in of such securities for three years) having no relevance to the tax rebate (incentive) being offered to such investors.
Sebi (ICDR) Regulations 2009 (Regulation 59) stipulates that no person connected with an issue shall offer any incentive, direct or indirect, whether in cash, kind, services or otherwise to any person for making an application for allotment of securities. Mutual funds and broking houses are bound to make upfront risk disclosures.
RGESS apparently has chosen not to counsel the 'new' investor on the risk of losing his entire investment due to inherent risks. Here, one is constrained to appreciate that the objective of RGESS is to channelise the hard-earned savings of small investors into the domestic capital market.
The government ought to have addressed the conflict of interest arising out of its dual role, one as the 'government' and the other as a promoter of Ratna companies and other PSUs, while formulating RGESS. It may be idle to contest that a promoter does not have any vested interest in his company. The Parliament enacted the Sebi Act with the twin objective of protecting the interests of investors and developing and regulating the securities market. Ironically, through a government notification, the regulator is compelled to instruct market intermediaries to facilitate a practice that is far from fair!
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