The amendments to delisting regulations by the Sebi board on Wednesday remove tax hurdles for sellers of shares as well as marginally reduce the cost for acquirers, in addition to saving time, resulting in a ‘win-win’ situation for stakeholders, say investment bankers and legal experts.
Experts said the biggest change in the delisting rules allows the use of stock exchange platform for tending shares in delisting, buyback, and takeover. This removes the liability of capital gains tax, and sellers will instead have to pay securities transaction tax (STT). This, along with the clause to achieve at least 25% minimum public shareholding, raises the possibility of better price discovery and increased success in delisting shares from the stock exchanges, they added.
Sudhir Bassi, executive director, Khaitan & Co, said the Sebi announcement on delisting creates a level playing field and helps keep investors on the same page as other traders. “The revision in rules mean that transactions through exchanges will result in payment of STT, and remove long-term capital gains tax liability. This will encourage greater participation and result in better price discovery, enabling companies reduce cost. However, we need to read the fine print,” Bassi said.
Rajesh Thakkar, partner of transaction advisory services at BDO India reiterated the positive impact on investor participation of investors in delisting. He said that tendering shares under the delisting process was earlier treated as an off-market transaction, leading to tax implications and lower cash flow at the hands of the investor in the process.
“Offering the stock exchange platform, at par with the takeover code and buyback regulation, will result in these transactions of delisting, also as market transactions, reversing the downfalls that were earlier experienced in the process. This change could encourage larger retail participation in delisting offers in future,” Thakkar added.
At present, an investor is liable to pay long term capital gains (more than one year) tax at 10% without indexation and 20% with indexation whichever lower in an open offer. This is then added to the income of the investor and taxed according to the tax bracket he falls under – 10%, 20% or 30%. In case the tenure of shares held is less than a year, an investor is liable to pay short-term capital gains which is directly linked to the income tax slab of the investor.
However, if a shareholder sells the shares in the secondary market, no tax would be payable if the shares are held for more than a year except STT at 0.1% on the equity transactions.
Apart from tax benefits, merchant bankers also highlighted certain cost benefits for the acquirers, albeit with caveats, as allowing interplay with the takeover code will help company to dump three-way process and achieve delisting in a single shot, provided it succeeds.
B Madhuprasad, non executive chairman, Keynote Corporate Service said companies would save about 40-60% of intermediary costs which are spent on document filing, merchant banker fees, advertising costs among others.
For instance, a company may have to spend about R10 crore on a R1,000 crore-deal that includes both open offer and then delisting under the old regime. However, with the one-way route the same cost may drop to about R4-5 crore.
As per earlier regulations, a company was acquired to reduce its shareholding to 75% to comply with minimum public shareholding (MPS), if a mandatory open offer was triggered at the time of acquiring a majority stake in a company. However, with Sebi aligning MPS norms, takeover regulations, and delisting, the company can achieve delisting in one attempt instead of going through the hassle of reducing its promoter holding to 75% under the MPS if it crosses the approved limit.