The Hindu Business Line : FCEBs into shares: Method to calculate acquisition cost

Code for tax
Conversion of FCEBs into shares not ‘transfer’
Can be converted/exchanged for shares of group co
Taxpayers may have to prove acquisition cost overseas

K.R. Srivats

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New Delhi, March 1 The Government has spelt out the method by which cost of acquisition would be determined for income-tax purposes for shares exchanged by a foreign investor under the foreign currency exchangeable bonds (FCEB) scheme.

The Finance Bill 2008 has now provided that the cost of acquisition of the shares received upon conversion of the bond would be the price at which the corresponding bond was acquired. It has also been provided that conversion of FCEBs into shares would not be treated as ‘transfer’ within the income-tax law.

Tax experts say that it is important to compute the cost of acquisition as such shares, if and when sold in stock exchanges here, could lead to capital gains tax at the hands of the foreign investor.

“The Budget has diverted from the well established existing principles of determining cost of acquisition of shares underlying FCCBs and ADRs/GDRs on the basis of the price prevailing on the NSE/BSE on the date of conversion. By specifying the cost of the shares with reference to the actual cost of the bonds, it is going to result in taxpayers having to prove the cost of acquisition of the bond overseas, which will possibly result in litigation,” Mr Hiresh Wadhwani, Tax Partner, Ernst & Young India, told Business Line.

The FCEB scheme, introduced in mid-February this year, 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 ‘exchangeable’ bonds as investors abroad could exchange them into equity shares or warrants of the listed group company before their redemption.

The FCEBs are bonds expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency. In 1992, the Government had allowed established Indian companies to issue foreign currency convertible bonds (FCCBs), with special tax regime for non-resident investors, so as to encourage the flow of foreign exchange to India.

While FCCBs can only be converted into shares of the issuing company, FCEBs can also be converted/exchanged for the shares of a group company, says the memorandum explaining the provisions of the Finance Bill 2008.

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FCEBs into shares: Method to calculate acquisition cost