The Hindu Business Line : Leveraged buyout for the layman

When a controlling interest in a company's equity is acquired principally through borrowed funds, it is called a leveraged buyout. Tata Steel's acquisition of Corus is a classic example of leveraged buyout. Typically, in such a buyout as much as 90 per cent of the funds required for the takeover are mobilised through borrowings principally through junk bonds carrying high interest.

But often the borrowings are made on the strength of the assets of the acquired company itself so much so that the audacious attempt is also labelled predatory acquisition. Tatas have borrowed on the strength of the assets of Corus. Since it is a case of 100 per cent buyout, shareholders do not lose out as they have exited at attractive valuations. The existing lenders would not suffer either because the loans secured on the company's assets are reported to be subordinate loans in the sense that they rank next in priority to the existing secured loans.

Time alone tells whether such audacity is justified. In the past, there have been several botched leveraged buyout attempts — later events did not bear out their confidence. There is something called winner's curse also — paying a huge amount for shares than warranted. But then on the flip side, there are many stories of successful leveraged buyout deals also.

Tax on securities sold

I am an individual and transact in securities of listed companies. In the current year (2006-07), I have sold securities at market value of about Rs 6 lakh. After deducting indexed cost, the net gain is about Rs 5.50 lakh. These securities were purchased in 1994. Now, do I need to pay any tax, that is, income-tax, capital gain tax, etc., on the amount realised?

B. Mantu, email

Profit made by an investor in shares is called capital gains. But the shares sold are all of the long-term genre having been sold after a year of acquisition. On long-term capital gains, there is no tax provided you sold these shares through a recognised stock exchange in India which collected Securities Transaction Tax (STT) from you from the sale proceeds at the prescribed rates.

The STT itself, however, cannot be deducted either from your other incomes or from your tax liability on other counts say on salary. STT gets a tax rebate only in the hands of a dealer in shares whose income from trading in shares is taxable as his business income and not as capital gains.

Greenshoe option

Can an Indian company making an exclusive issue to employees with greenshoe option also offer the shares to foreign nationals who are its employees?

Laxmikant Lahoti, email

The concept of greenshoe option is normally associated with public issues. There is no reason why in an issue in which employees alone can participate, the company should give itself the greenshoe option given the fact that its twin purpose is to retain over-subscription to the extent permitted and to offer a limited safety net to the shareholders — one month under the SEBI guidelines — concerns unique to public issues.

Be that as it may, there seems to be no bar in allotting shares to foreign nationals subject to fulfilment of the provisions of the FEMA.

(ASK! Send in your queries to ask@thehindu.co.in.)

http://MentorQA.blogspot.com

S. Murlidharan

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