IPOs have become a preferred route for PEs to sell their stakes. Of the Rs 204-billion raised through IPOs this year, Rs 139 billion is on account of Offer for Sale (OFS) by promoters and PE investors. Investment bankers say more than half of the Rs 200-billion IPO pipeline consists of OFS by PEs and existing shareholders.
“We have given a representation to both the finance ministry and CBDT on how the capital gains would be calculated. While the authorities have already expressed their intent to provide fair rules for genuine market transactions such as IPOs, there are still doubts,” said a source.
Two views are emerging in the market on this. First, merchant bankers could be asked to calculate the fair market value (FMV) of a company's shares as on January 31 and consider it the reference price. However, the authorities have reservations, since FMV is open to interpretation. Also, there are concerns that companies could keep the FMV on par with the IPO price, to avoid showing any capital gain.
The second scenario for companies where there is no publicly disseminated price available is that the benefit of grandfathering would not be extended.
“Both views are legally plausible but it will be good if the CBDT clarifies” said Amit Singhania, partner, Shardul Amarchand Mangaldas.
The central government had reintroduced an LTCG tax after 15 years. All this while, sale of shares held for more than 12 months in a listed company were exempt from this tax. From April 1, even shares held for more than a year were subject to capital gains tax. To apply the law prospectively, the government introduced grandfathering for existing investments; essentially exempting all gains made before introduction of the new law from its ambit.
Under the new rules, shares held for more than a year will be subject to 10 per cent capital gains tax, while shares held for less than a year are subject to 15 per cent. These rates would only apply if Securities Transaction Tax was paid during purchase of shares.
PEs seek clarity on how LTCG would be applicable on sales of shares via IPO
For listed companies, market price as on January 31 is considered for calculating LTCG
However, IPO-bound companies were not listed as on January 31 and hence market price as on the day is not available
The issue assumes significance as IPOs have become favoured routes for PE investors to sell their stake in unlisted companies