Jet may issue fresh shares to Etihad in stake sale

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SummarySale of shares by Tail Winds could attract capital gains tax

Jet Airways is likely to issue fresh shares instead of selling a part of their promoter stake to Etihad to give the latter a 24 per cent stake. The plan to issue fresh shares makes is possible for the Abu Dhabi-based airline to buy into Jet but will not entail any tax liability.

On the other hand, a sale of stake to Etihad by Tail Winds Ltd, the Isle of Man registered promoter entity that currently owns over 79 per cent stake in in Jet Airways, will attract capital gains tax. The nature of the liability will be similar to the Vodafone-Hutch Essar deal and is taxable as per current Indian laws. If the government accepts the Parthasarathi Shome committee report on the subject, which has suggested that such transfer of shares should be tax free before the deal comes through, the tax implication will be solved.

Senior officers from both the airlines met finance minister P Chidambaram on Friday about the deal but none of them coming out of the meeting offered any comments.

According to a source familiar with the deal, issuing of fresh shares will expand the equity base of Jet Airways and dilute the current holdings in the airline. A subsequent open offer can further reduce the stake of promoter entities such as Tail Winds, but as it would be conducted through an exchange, will not attract any long term capital gains tax. However, this will not address the concerns of foreign holdings in the company and the promoters could seek an exemption from the government.

A sale of any of Tail Wind’s stake now will instead trigger a tax demand. Even if the shares are transferred to Naresh Goyal before Etihad buys them, the tax demand would remain valid.

Emails sent to Jet Airways and Etihad on this issue on Wednesday did not elicit any response.

Tail Winds Ltd had declared its stake in Jet as an overseas corporate body. But in September 2003 these bodies were merged under the umbrella of foreign investment. Jet, like several other companies, was given time to reduce its investment from Tail Winds to less than 49 per cent by 2013, under a ten year extension of the deadline.

The issue of the extension of deadline to bring down the foreign stake in the airline was also discussed in the meeting Jet Airways and Etihad had with civil aviation minister Ajit Singh and commerce minister Anand Sharma on Thursday and Finance Minister P Chidambaram today.

“If the transfer of shares of an Indian company will be made by an erstwhile OCB to an NRI, it will require compliance with the foreign exchange regulations/guidelines,” said Lalit Kumar, partner, J Sagar Associates. Currently, Tail Winds owns 79.99 per cent in Jet Airways. Naresh Goyal, in his personal capacity, owns only 0.01 per cent in the company. Jet Airways shares closed at Rs 622.65 a piece, up 0.09 per cent, on the BSE on Friday.

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