The Takeover Regulations Advisory Committee (TRAC) set up by the Securities and Exchange Board of India (SEBI) has introduced draft revised takeover regulations which, if implemented, will lead to major changes in the existing regulations governing substantial acquisition of shares in a listed company.

Open offer size

One of the key changes proposed is increase in size of open offer by an acquirer from the existing minimum 20 per cent to 100 per cent. As per the revised draft, an acquirer considering to acquire more than 24.99 per cent of voting rights in a target company, or considering to acquire control in a target company, will now have to make an offer to acquire 100 per cent of the equity shares of the target company from the existing shareholders of the target company.

While this move brings parity among shareholders of the target company by giving an equal opportunity to all for making complete exit from the target company, there is a need to bring parity in terms of how the shares offered in the open offer are taxed vis-à-vis those sold in the open market.

Under the current tax regime, profit on sale of shares, being short-term capital asset on which Securities Transaction Tax (‘STT') has been levied, is taxable at an effective rate of 16.61 per cent and 15.45 per cent in case of company and individual respectively. In case of shares being long-term capital asset, profit on sale of shares on which STT is levied is tax exempt. However, shares sold in off-market transaction are taxed at the tax rates applicable. Accordingly, shares which are tendered in the open offer are regarded as off-market transaction on which the concessional rate of tax is not applicable.

A disincentive

This differential treatment of tax dis-incentivises the retail shareholders to tender their shares in an open offer and, thus, it may be beneficial for them to sell their shares in the open market close to an appropriate date before the commencement of offer period, resulting in excessive liquidity in the market.

As per the current regulations, retail shareholders may sell a proportionate stake based on the percentage of the open offer. But, after the proposed amendment, there may be a case to sell their entire stake in the market.

Even TRAC, in its report, has pointed out the need for tax parity for shares acquired in open offer, and has suggested that SEBI take up the matter with the Government.

In the light of the above, concerns regarding differential tax treatment need to be reviewed by SEBI and positive recommendation should be given to the Ministry of Finance to make appropriate/suitable changes in the provisions so as to enable open offers to be on level-playing field with transactions routed through stock exchanges.

However, the revised draft of the proposed Direct Tax Code indicates that the STT will be calibrated and not eliminated and, thus, the impact on the continuance of the differential tax treatment on the on-market transactions still needs to be seen.

(With inputs from: Neeraj Sharma, Assistant Manager, M&A Tax, KPMG.)

(The author is Director, M&A Tax, KPMG.)

(This article was published in the Business Line print edition dated August 12, 2010)
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