S Murlidharan

Why are block deals awarded special treatment by the taxman?

S Murlidharan | Updated on June 12, 2020

Why should deals that are admittedly private be allowed on the stock exchange platform, given that screen-based trading is supposed to be between two anonymous parties?

A block deal is a trade with a minimum quantity of five lakh shares or minimum value of ₹5 crore, executed through a single transaction on the special “block deal window”. Usually, a block deal happens when two parties agree to buy or sell securities at an agreed price between themselves and inform the stock exchange, so that they can use its platform during the 35 minutes reserved for such deals before public trading starts.

Kotak Mahindra Bank Ltd’s promoter Uday Kotak on June 2, 2020, sold 56 million of his shares of the bank for at least ₹6,913.75 crore through a block deal in an effort to reduce his stake in the bank to 26.1 per cent, close to the promoter-holding level as allowed by the RBI.

Earlier, Airtel promoter Bharti Telecom Ltd announced that it was selling shares worth $1 billion in the mobile operator, in a block deal involving 2.75 per cent of its stake.

Block deals may be on the rise during Covid-19 times, but they are by no means of recent origin. In India, capital gains earned through recognised stock exchanges have been taxed softly. Earlier, long-term capital gains from bourses were completely exempt from tax, so long as the securities transactions tax (STT) was paid on them both at the time of purchase and sale. However, former Finance Minister Arun Jaitley brought them into the income tax net as well, with effect from April 1, 2019 — with ₹1 lakh exempt from tax secularly for everyone and the excess taxed secularly at 10 per cent.

It is this kid-glove treatment given to gains from the bourses that beckon even private deals to the bourses. The famous and most-talked about settlement of cross holdings between the Ambani brothers in 2005 was consummated through block deal platforms of recognised stock exchanges in India.

The moot question is, why should deals that are admittedly private be allowed on the stock exchange platform, as screen-based trading is supposed to be open and transparent, between two anonymous parties? Of course, sellers court the stock exchange with an eye on making a huge saving on their capital gains tax liability. That is understandable, but why should the government countenance such an elaborate charade?

It is surprising that the income tax law, while refusing exemption from long-term capital gains tax to profits made by public shareholders when an acquirer buys them out partially hot on the heels of takeover, thinks nothing of magnanimously sparing block deals simply because the former did not go through a recognised stock exchange. The bottomline is, while the promoter selling his stakes in a friendly takeover consummated at the block deal platform of the stock exchange laughs all the way to the bank, thumbing his nose at the taxman, the public shareholder who also gets the same price per share from the new promoter chafes at the tax burden and discrimination.

Promoters use the block deal platform of stock exchanges to maximise their realisations. For, if they were to unload a huge quantum of shares on the same day, quotations will surely plummet dangerously. And selling in driblets is a time-consuming affair. A block deal, in other words, protects the quotations from the vicissitudes of the normal trade.

The writer is a Chennai-based chartered accountant

Published on June 12, 2020

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