The Hindu Business Line : BSE-500 stocks: Investors & long-term capital gains tax

RETAIL investors, it appears, have not set much store by the announcement made by the Finance Minister, Mr Jaswant Singh, in Budget 2003 that investments made in stocks that are part of the BSE 500 and held on for longer than 12 months would be exempt from capital gains tax.

Such a move was expected to encourage retail investors to pull out money idling in bank deposits and park them in equities instead, lured by the tax sop.

An analysis of the shareholding pattern in those stocks within the BSE 500 that have delivered the maximum returns over the past one year shows quite a contrary picture, though. Public shareholding in all but two of the top ten gainers of the BSE 500 has fallen in December 2003 as compared with March 2003. The two stocks in which public shareholding has risen, albeit marginally, are Pantaloon Retail and Hindustan Zinc.

This indicates that retail investors have shown an inclination to lock into profits as and when the stock price has risen appreciably, rather than wait out a stipulated period to avail of a tax exemption.

This also fits in neatly with the views expressed by Mr Sashi Krishnan, Chief Investment Officer of Chola Mutual Fund. According to Mr Krishnan, as most of the stocks that have registered a significant rise belong to the mid-cap category, investors should look to exit from them when there are still enough buyers around, as opposed to waiting for such stocks to peak.

Tax experts have another view to offer, though.

A tax consultant averred that most investors who profit from stock market transactions hardly pay any tax of gains that accrue from them. Exiting a stock is driven more by the prevailing price rather than any tax advantage consideration, he says.

What about investors who have continued to hold on to such stocks? For starters, their wallets would have gotten just that bit fatter. If one reckons a basket of the ten stocks that have posted the maximum gains, its value has appreciated by close to 15 per cent since December 2003.

And according to Mr Motilal Oswal, Chairman and Managing Director of Motilal Oswal Securities, the incentive of a tax break is no reason for people to sell heir holdings immediately.

In his opinion, the mood in the markets is bullish and there is no necessity to resort to premature selling. Investors would be better off waiting for a few more months before they consider profit-booking opportunities, he reckons.

For a set of investors for whom the stock market boom has reaped a bounty, there is another that has been hit rather badly. Take, for instance, the case of Mastek and Morepen Labs. In these two stocks, which are at the bottom of the returns list, public shareholdings have increased significantly, on the back of offloading by both FIIs and mutual funds.

Morepen has seen public shareholding rise to 54 per cent (as of quarter ended December 2003), a 35-percentage-point jump compared with March 2003; Mastek has seen public shareholding rise by 18 percentage points to about 30 per cent (as of quarter ended September 2003).

At a broader level, about 250 of out the 500 stocks within the BSE 500 have posted returns in excess of 100 per cent over the past year. The list also includes stocks such as Divi's Labs and Maruti, which were listed after March 1, 2003, and hence not considered for the purpose of this analysis.

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BSE-500 stocks: Investors & long-term capital gains tax