There could have been an undervaluation of shares of the Indian arm of Shell while they were transferred to the Dutch parent.

The income-tax officer, like the auditor, is privy to significant information. Like an auditor, who is cast in the role of whistleblower by the Companies Bill, 2012, the income-tax officer can play a similar role and alert other authorities.

The Income-Tax (I-T) Department smells something fishy in gross undervaluation of shares of the Indian arm of Shell by as much as Rs 15,000 crore, while they were allotted to the Dutch parent a few years ago. It suspects the same about the shares of the Indian arm of Vodafone allotted to a Mauritius company.


Shell India has been contemptuous in its dismissal of the taxman’s concern on the ground that it would snuff out FDI! Really?

While it is true that allotment of shares results in a capital receipt for the Indian company, outside the pale of taxation, it is equally true that the Indian company and, by extension, the Indian economy has been short-changed to the extent the parent has been allotted shares at such a huge discount.

Who is to blame for this? It could be Foreign Investment Promotion Board or other authorities concerned with approving foreign investments. Shouldn’t these authorities consult the jurisdictional commissioner of income tax as well as the auditor of the Indian company, whose shares are proposed to be sold for a song to the foreigners?


Alternatively, shouldn’t they order independent valuation of shares from a credible accountancy firm? Don’t Indian companies making offshore issue of shares through Global Depository Receipts (GDR) seek to ensure that the GDRs issued abroad are at the same price or slightly more vis-à-vis the quotations for the underlying shares in the Indian bourses?

It is not as if the income-tax authorities’ word should be accepted as final, but in all fairness to them and the nation, the valuation by a pliable Indian subsidiary should not be accepted as sacrosanct either. That is why there is a need for independent valuation, unless the FIPB or other authorities concerned have the wherewithal, like the erstwhile Controller of Capital Issues, to make an in-house appraisal of valuation of shares.

There is a view that foreign companies have to be indulged at all costs and their shenanigans winked at on the ground — that it is we who need them more and not the other way round. To these worthies limitless royalties are kosher. Otherwise, they would not bring their best products and technologies to India, is their refrain.

While we should not scare away foreigners with jingoistic policies and utterances, there is no need to bend over backwards to please them; the truth is foreign companies at the end of the day have to hawk their products and technologies abroad, especially in the emerging markets, after exhausting their own markets back home.

Allotment of equity for technology bristles with the same problem; often, technology is overvalued and shares of Indian companies are undervalued.

The immediate consequence of undervaluation of shares might appear to be just self-flagellation or self-denial. But should the Indian arm whose shares are on offer to the foreign companies decide to go public in future, it would introduce inequities between public shareholders and the foreign company.

One may turn around and say that promoters of Indian companies allot to themselves shares at a par and make a killing by unloading a minuscule part of their shareholding in the market, post-public issue, with shares issued to the public always being overpriced.

The contention, perverse as it is, could be if the Indian promoters can short-change the Indian public shareholders, so can the foreign promoters of Indian companies.

But two wrongs do not make a right. Just as premium fixation of IPOs in India would have to be rationalised, allotment of shares to foreign companies in their Indian arms too should be.

In fact, the consequence of undervaluation to foreign companies is graver in that precious foreign exchange is involved.


What lends credence to the suspicion of the I-T department in the context of Shell and Vodafone is these two have had a long presence in India and their operations are hugely profitable.

It is not as if the allotment of shares at huge discount is in consideration of them nursing the Indian arm assiduously.

On the contrary, they get to take a luscious bite into a fully ripe fruit, only to consolidate their grip on the venture.

The I-T authorities, instead of being pilloried for not knowing the difference between capital and revenue receipts, must be hailed for giving a wake-up call.

When such a small investment gets a disproportionate share of the equity pie, foreign companies would be getting a disproportionate share of profits, for which lesser mortals have to pay a premium.

Alas, the tax authorities should have exercised similar vigilance in the face of FIIs getting into the capital gains bandwagon and routing their investments through Cayman Islands and Mauritius.

(This article was published on February 11, 2013)
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