HDFC merger: tax implications for shareholders

The document date for the merger of HDFC Ltd with HDFC Bank was 13 July. The document date is the deadline set by an organization to find out the eligibility of shareholders to obtain dividends and distributions. As per the share trade ratio of the merger, for each 25 shares of HDFC, 42 shares of HDFC Bank have been issued to the previous’s shareholders. If we break this all the way down to per share stage, one can say that the ratio is 1.68 shares of HDFC Bank for each 1 share of HDFC.

Shares are thought of capital property underneath earnings tax (IT) regulation, and any achieve on their sale is handled as capital features. However, within the case of a merger, the IT regulation doesn’t take into account the swap of shares as a switch, making certain that it’s tax-neutral for shareholders. To qualify for this tax-neutral profit, the merger should meet sure standards. First, all property and liabilities of the amalgamating firm have to be transferred to the amalgamated firm. Second, a minimal of 75% of shareholders (in worth) of the amalgamating firm should change into shareholders of the amalgamated firm. The case of HDFC Bank qualifies for each of those situations.

Capital features on sale of shares is calculated on the idea of the holding interval and the date of acquisition of shares. If somebody receives shares as a part of a merger, the holding interval is counted from the date of buy of the amalgamating firm’s shares (HDFC Ltd on this case).

Let’s perceive this with an instance. Suppose you got 30 shares of HDFC Ltd on 1 April 2019 at ₹2,000 per share, thus spending ₹60,000. As per the share trade ratio upon merger, you’re entitled to obtain 50.4 (42/25*30) shares of HDFC Bank. But since there isn’t any idea of fractional shares in India, you may be issued 50 shares of HDFC Bank. Further, as per the Bank’s BSE announcement of 14 July, the share allotment train has been finished and the itemizing of those shares is underneath course of.

Now, let’s assume these 50 shares of HDFC Bank are listed on the exchanges on 17 July at ₹1,700 per share. Further, assume you promote these 50 shares on 1 August for ₹1,800 per share which makes the entire gross sales consideration to be ₹90,000. This sale transaction can be topic to capital features tax.

In the case of listed firms, fairness shares held for greater than 12 months are categorised as long-term capital property, whereas these held for a shorter interval are categorised as short-term capital property. In the above instance, the holding interval is from 1 April 2019 to 1 August, making the features long-term capital features.

The value of buy of shares of HDFC Ltd can be taken to be the price of buy of shares of the HDFC Bank (amalgamated firm). In this instance, the price of buy of fifty shares of HDFC Bank obtained on merger shall be ₹59,524 ( ₹60,000/50.4*50). This adjustment to the price of buy is completed as in opposition to the unique value of HDFC Ltd share entitlement of fifty.4 shares. Accordingly, there can be a long-term capital achieve of ₹30,476 ( ₹90,000- ₹59,524). One essential factor to notice right here is that the good thing about grandfathering may also be obtainable in circumstances the place shares of the amalgamating firm have been bought on or earlier than 31 January 2018.

As for the 0.4 fractional entitlement, because it is not going to be given as a share, the shareholder can be paid consideration in money or type. This can be taxed as capital features because the shareholder has not obtained shares in lieu of shares and so, not like the swap of shares on a merger, no tax profit is given right here. In our instance, your fractional entitlement was 0.4 shares. Let’s assume that on the day you’re paid for the fractional entitlement, the worth of 1 share of HDFC Bank was ₹1,820. The capital achieve on the fractional entitlement would be the worth of 0.4 shares, i.e. ₹728 ( ₹1,820*0.4) as diminished by the price of buy, i.e. ₹476 ( ₹60,000/50.4*0.4) which comes out to be ₹252. Rules of the holding interval to categorise it as long-term or short-term will apply as talked about above.

Sambhav Daga is companion at Sunil Johri & Associates

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Updated: 16 Jul 2023, 10:26 PM IST

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