The Hindu Business Line : No capital gains on transfer of ‘exchangeable bonds’ outside India

The Finance Ministry has said that exchange of foreign currency exchangeable bonds (FCEBs) into shares would not give rise to any capital gains that would be liable to income tax in India.

Similarly, FCEBs transferred outside India by an investor who is resident outside India to another investor resident outside India would not give rise to capital gains liable to tax in India, the Finance Ministry has said in its FCEB scheme announced few days back.

The FCEB scheme has been designed to help Indian promoters raise money abroad by issuing foreign currency bonds against the value of their investments in shares of listed group companies.

The bonds are described as ‘exchangeable’ bonds as investors abroad could exchange them into equity shares or warrants of the listed group company before their redemption.

Although the FCEB scheme spells out taxation treatment on exchangeable bonds, some tax experts point out that the scheme lacks clarity on how the cost of acquisition of shares should be computed for income tax purposes when such shares are sold by an investor in the stock exchanges.

It is now widely perceived that sale of shares that were received by a foreign investor through exchange under the FCEB scheme would attract tax in India.

“There is no clarity in the FCEB scheme on how the cost of acquisition would be computed for the foreign investor on the shares exchanged under the scheme and, subsequently, sold in stock exchange.

“Such shares when sold in stock exchanges would lead to capital gains if they are sold by the foreign investor within 12 months from the date of exchange. While this seems to be an oversight, in the absence of clarity this could lead to litigation,” Mr Hiresh Wadhwani, Tax partner, Ernst & Young India, told Business Line.