It has been raining IPOs over the past several weeks, and not without reason. With the long-term capital gains tax kicking in from April 1, existing shareholders in unlisted companies appear to have been in a frenzy to offload their stake in the current fiscal year itself.

Four out of the five IPOs from non-government companies issued in March – Sandhar Technologies, Bandhan Bank, ICICI Securities and Lemon Tree – have been in the form of full or partial offer for sale by existing shareholders.

But the reasoning that the impending tax on share sale has been the key reason for the IPO rush isn’t exactly black and white. There have been several ‘ifs’ and ‘buts’ on whether promoters or existing shareholders do in fact gain in the deal. Given that under the earlier regime, the exemption of long-term capital gains tax did not apply to unlisted shares, and they were anyway taxed, will the new tax regime impact them at all?

While the IPO issues have happened in the current fiscal, if the shares are listed after April 1, will they still escape the tax levy? After all, much of the mad rush has happened in the fag end of March, making it impossible to list before the April 1 deadline.

LTCG applies

Earlier (until March 31), one of the conditions for the long-term capital gains on transfer of shares to be exempted, was that the transaction is chargeable to securities transaction tax (STT). Hence, unlisted shares fell out of this purview and long term capital gains tax of 20 per cent was applicable. So what happens when shareholders in an unlisted company sell their shares in an IPO?

Experts say that as the shares issued as a part of offer of sale in an IPO are chargeable to STT, selling shareholders were exempted from capital gains.

By that same logic then, the introduction of long-term capital gains tax from April 1, will also apply to share sale through IPOs. From April 1 , capital gains on selling listed shares held for more than a year will be taxed at 10 per cent without indexation benefit, on gains exceeding ₹1 lakh.

Hence, promoters or existing shareholders, selling a substantial stake in the company, have been making a beeline for IPOs, to escape the tax outgo.

Bandhan Bank IPO was a combination of fresh issue of around 9.8 crore shares and an offer for sale (OFS) for 2.16 crore equity shares. Hence, the existing shareholders were selling nearly ₹810 crore worth of shares. A 10 per cent long-term capital gains tax, would have meant a substantial haircut in their returns (depending on their purchase price). ICICI Bank sought to sell 24 per cent of its stake in ICICI Securities through an offer for sale amounting to about ₹4,000 crore. Lemon Tree Hotels, too was an offer for sale amounting to around ₹1,000 crore.

So has the rush helped the existing shareholders in these companies to escape long term capital gains tax?

Transfer of shares

The crucial factor that determines this is the date of transfer that will be considered to apply long-term capital gains tax. Only if the date of transfer is before April 1 , can the existing shareholders escape the tax levy.

Varying views on this had left market players flummoxed. If the date of listing of these shares is considered as the date of transfer, then with most of these issues coming in just a few days before the fiscal year end, it seemed unlikely that selling shareholders would gain anything from the last-minute rush.

ICICI Securities IPO which closed on March 26, for instance, would not have been able to list before April 1. According to SEBI’s norms, listing of public issues have to be done within six days from the date of closure of the public offering.

But some investment bankers say that it is not the date of listing, but the ‘date of allotment of shares’ to the subscribers that is considered as the date of transfer of shares in an IPO. According to SEBI’s norms the upper time limit for allotment of shares is four days (T+4) from the date of closure of the issue.

Even in the case of ICICI Securities, if the allotment happens by March 31, then ICICI Bank selling its stake, can manage to escape long-term capital gains tax. However, Lemon Tree IPO, which closed on March 28, may not be able to finish the allotment of the shares by March 31.

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