To soften tax blow, Jhunjhunwala sells 1L shares in Crisil in open market

Another large Crisil investor has chosen to offload the company?s shares in the open market instead of tendering them through the open offer route. Stock exchange disclosures show that last week Rakesh Jhunjhunwala?s Rare Enterprises sold 1 lakh shares of Crisil worth about R11.83 crore in the open market, representing 0.1418% of Crisil?s total share capital.

The transaction coincides with the sale of stock by Crisil?s MD & CEO Roopa Kudva, who also chose to sell 1.6 lakh shares valued at R19 crore on July 24 in the open market to avoid capital gains tax. American credit ratings and business analytics major McGraw Hill Financial launched its R1,900-crore voluntary open offer in its Indian arm, Crisil, on July 24, whereby the foreign entity aims to increase the promoter and promoter group stake to 75% at a price of R1,210 per share. The offer closes on August 6.

According to stock exchange disclosures, Jhunjhunwala, along with person acting in concert (PAC) Rekha Jhunjhunwala, sold 33,000 shares on the NSE and 67,000 shares on the BSE, both transactions at an average price of R1,182.39 per share. After the sale, shareholding of Rare Enterprises in the ratings agency would now drop to 5.6732% from 5.8151%. The sale transaction by Rare Enterprises would attract about R1.2 lakh in tax based on 0.1% STT levied on total turnover.

On the other hand, Rare would have been liable to pay a capital gains tax of about R2.37 crore had the shares been tendered in the open offer. Investors who hold shares for a year or longer and tender them in open offer are liable to pay capital gains tax of 20%. For a holding period of less than a year, the investor has to pay tax as per the respective income tax slab rate.

In contrast, investors do not have to pay any long-term capital gains tax on shares sold in the open market if the holding period is more than a year. However, holdings of less than a year attract short-term capital gains tax of 15%.

Experts said it is prudent to sell shares in open market, where the price is almost at par with the open offer and there is no tax. ?If price in secondary market is the same or near the offer price and there is no capital gains tax, it makes more sense to sell shares in the open market…However, it does not mean the open offer price is unattractive,? said an investment banker.

It?s not uncommon for investors to not tender shares during open offers. For instance, open offers of HUL last month, as well as those of Glaxo SmithKline Pharmaceuticals in June and GlaxoSmithKline Consumer Healthcare earlier this calendar year, did not garner full participation from investors.