The income-tax law is kind to capital gains from the bourses. While short-term capital gains (sold within 12 months of acquisition) are taxed at a flat 15%, long term capital gains are taxed at a soft 10% after exempting the first Rs 1 lakh. This indulgence provides the gravitas for camouflaging what is essentially a private deal into a stock exchange transaction. To wit, let us say an incumbent promoter is making way for a new promoter by exiting completely i.e., by selling off his entire stake to the latter. Usually what is on offer are long term shares the gains from which can get away with just a slap on the wrist — 10% tax. So, they play an elaborate charade and our stock exchanges wink at it by offering their block deal platform provided the size of the deal is 5,00,000 in number or more than Rs. 10 crores in value. These alternative conditions do not unduly challenge the parties to the transaction as control sale often are for a lot more than the above requirements. Thus, if the existing promoter is offering his 26% stake to the newcomer for say Rs 50 crore, they do not sign a private agreement as they should but instead use the stock exchange’s block deal platform with an eye on substantial savings in tax for the seller. Why should the SEBI countenance such a farce? After all, stock exchange is a public platform where transactions are consummated transparently through screen-based trading in which anyone who can match the quantity and price can participate, be it a buy offer or a sell offer. Block deal platforms must be shut and parties compelled to enter into private deals and pay full tax and not the one reserved for gains earned through bourses.
When it comes to small shareholders however the full force of law is applied, which is what happens when a public offer is made under the takeover regulations. Under the SEBI takeover regulations, an acquirer crossing the Rubicon i.e., the 25% threshold must make a public offer to the other shareholders to buy them out to the extent of 26% of the total capital of the company thus making him a 51% shareholder at the end of the day. The rationale is laudable as the public too should in all fairness get a taste of the attractive price wangled by the seller from the acquirer. Now the problem is the public will have to pay full tax i.e., 20% if what they have earned from the acquirer is long term capital gains because it was a private deal between the two. How unfair! When the two moneybags enact a farce and use the block deal mechanism, it passes the test of stock exchange dealing but no such liberal interpretation for the small shareholders! In fact, there is a compelling reason for deeming the sale to the acquirer a stock market deal — the law requires the acquirer to make public offer. The small shareholder thus is not voluntarily entering into a private deal but doing so due to the fait accompli. In any case, the acquirer is not actually entering into a furtive private deal when he makes a public offer.
OFS or offer for sale is another distortion. Often in India it is IPO cum OFS. While the proceeds of IPO go into the coffers of the company, the proceeds of OFS go into the coffers of the promoters (including private equity players and venture capitalists). It is common knowledge that in India IPO prices are vastly exaggerated with even loss-making companies getting away with mind-boggling premiums on the facile ground that their future is bright. Touché! Now enter OFS and the greed multiplies manifold because the promoters unload their holdings at the same attractive IPO prices. In other words, the shares allotted on IPO-cum-OFS are fungible or indistinguishable so much so that an allottee doesn’t know whether he got from the IPO pool or the OFS pool. Promoters have a vested interest in getting exaggerated valuations for the IPO so they can ride piggyback on it through OFS. The recent IPO made by Mankind Pharma was actually 100% OFS but the market loosely called it IPO. Shouldn’t the market be the place for unloading be it by promoters or small investors? Quite often, allottees have a chastening experience with listing losses staring at them. How unfair again! Promoters exit at exaggerated valuations by dumping their stakes to a substantial extent through the self-serving OFS route without having to face the rough and tumble of the turbulent markets.
Finally, why should a company be made to pay the buyback tax of 20% when the fruits of such buyback are enjoyed by the shareholders? The Finance Minister set right the distortion of dividend taxation by junking P Chidambaram’s baby, DDT or dividend distribution tax regime under which the company distributing dividend paid a 15% DDT leaving shareholders untouched. This benefitted the big-ticket shareholders like promoters who got away lightly with a vicarious impost of 15% whereas had they been directly taxed, as they are now, the tax liability would be 30% plus. The same rationale ought to apply to buyback. Ease of collection of tax from a single person makes a strong case for the existing regime but fairness and equity demand that the one benefitting from exercise ought to cough up the tax. That companies like TCS and Infosys looking to return the excessive capital have not been fazed by the buyback tax of 20% cannot be the justification for not taxing the actual beneficiary.
S Murlidharan is a freelance columnist and writes on economics, business, legal, and taxation issues
