Crank up the volume!
The Equity Linked Savings Schemes (ELSS) are mutual fund schemes that are designed to keep your investment locked in for 3 years. Furthermore, your investment in this fund (up to a maximum of Rs 1 lakh) is free of any tax.
After 3 years, the capital gain on this investment is also free of tax.

In the past year about Rs 3,500 crore of money has come into the ELSS mutual funds. The government can dramatically increase the inflows into a locked-in class of shares issued by any mutual fund.
There are an estimated 36 million tax payers in this country. We do not have any statistics on how these 36 million tax payers used the Section 80 C benefit: how was that Rs. 1 lakh broken up. How much was invested in ELSS mutual funds, how much was used to repay home loans, etc.

But, let’s take a few guesses.
What if the government announced that under Section 80 C, individuals could invest in any equity mutual fund (in a special class of shares with a 3 year lock up) to the tune of Rs 10 lakhs per person.
And this Rs 10 lakhs was also exempt from tax.
Such an exemption would cost the government about Rs 3.5 lakhs in taxes for every person who does invest the maximum limit of Rs 10 lakhs.
The assumptions in Table 1 below indicate that there would be a buying power of Rs 141,500 crore every year from the local Indian flows.
That is a buying power of Rs 179 lakhs every minute.
This is over 3x the selling of Rs 53 lakhs per minute by the foreign synthetic investors so far this year.
Back to economics: when demand for shares (the buying from local Indians) is more than the supply (the selling by synthetic foreigners) then share prices will increase.

But there is a huge tax cost to the government in terms of tax revenues not collected. This is a huge Rs 26,750 crore - which is equal to 25% of the total direct taxes collected by the government from the individuals.

Surely, this idea of increasing the Section 80 C benefit to Rs 10 lakhs per year is idiotic!
Well, not if you see the benefit the government gets from all that buying of shares by the local Indian investors.

In addition to the Securities Transaction Tax (STT) that a buying of Rs 141,500 crore would directly generate - and the indirect increase from more investor interest in the market and higher STT collections - there is the direct benefit to the government from an increase in share prices of companies in which they have ownership.

The government has significant ownership of companies like State Bank of India, ONGC, and BHEL to name a few. The share prices of these companies have declined by 30% this year. The loss in market cap of these companies has cost the government a loss in value of their shareholdings of probably USD 100 billion (Rs 400,000 crore). With the local Indian money coming into the market, share prices will recover - and the government will see a recovery of its USD 100 billion loss, at the very minimum.
The government could easily sell down its stake in many of these companies over the next few years to offset the loss of tax.

So, a loss in the revenue side of Rs 26,750 crore from lower tax collections could see an enhancement of over Rs 400,000 crore in the value of the government’s holdings. A sale of 5% of these holdings would generate Rs 20,000 crore in money back to the government. A 7% sale would see a total recovery of the “loss in tax” amount.

More importantly, India will have built a more robust local demand base for long term investing.

India is an economy in a long term bull phase, in stock market terminology. But the market structures - with the dominance of the synthetic P-Notes - is so messed up that our stock markets act like we are about to enter the dark ages!

The government needs to shovel more local savings into the Indian stock markets and allow the long term foreign investors quicker access via a more refined FII process. If Bollywood can dance, why not give Indian investors a chance to shake with the real thing, too.

Meanwhile, while we all wait for the government to encourage us to buy more, keep in mind that valuations of many stocks in our opinion, are really attractive.

Read about the new Index ETF that Quantum AMC has just launched. You can invest in the long term direction of the markets without worrying about selecting any individual stocks or type of mutual fund scheme. All this convenience at a low cost.

Source: Building a Local Bull

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