Bharat CPSEs' Consultative Conclave inaugurated at Gati Shakti Vishwavidyalaya (See 'Corp Brief') SAIL's 54th AGM highlights strong value added steel growth (See 'Corp Brief') TDB-DST signs pact with GalaxEye to develop next-generation multisensor satellite technology (See 'Corp Brief') Nadda to inaugurate Arogya Manthan 2026 at Vigyan Bhawan (See 'Corp Brief') IPR - Civil remedy u/s 55 of Copyright Act can be pursued through arbitration as agreed alternative dispute resolution mechanism: HC (See 'Legal Desk') Railways approves Rs 166 Crore for construction of Road Over Bridge in Vadodara (See 'Corp Brief') ICAR-CMFRI advises Consumers Not to Avoid Tuna (See 'Corp Brief') IPR - Scheduled Commercial Bank which is registered proprietor of well-known formative trademarks can maintain commercial suit for infringement and passing off against unauthorised third parties who use those marks on social media to hold themselves out as agents capable of procuring loan settlements: HC (See 'Legal Desk') Indo-Africa Roundtable on WASH held as part of India International WASH Conference (See 'Corp Brief') Naik holds meeting with European Parliament's Committee on Industry (See 'Corp Brief') A&C - If a company is employed as conduit for shielding assets from creditors, Court may look beyond corporate structure, for piercing veil: HC (See 'Legal Desk') CCI approves acquisition of Onesto Labs by L'Oréal India (See 'Corp Brief') CCI approves acquisition of equity share of IIFL Capital by FIH Mauritius (See 'Corp Brief') IPR - If party adopts mark that is deceptively similar to registered mark for identical goods, with full knowledge of prior statutory and common law rights, such adoption constitutes infringement: HC (See 'Legal Desk') National Rainfed Area Authority organizes High Level meeting for Watershed Development (See 'Corp Brief') Railways connects Remote Area of South Chhattisgarh (See 'Corp Brief') IPR - Requiring plaintiff to sue at place of its subordinate office because cause of action has arisen there would amount to re-writing Sec 134 of Trade Marks Act: HC (See 'Legal Desk') Rs 46 Crore released for Rehabilitation of Persons Engaged in Begging (See 'Corp Brief') FEMA - The fact that penalty falls within statutory maximum does not, by itself, validate quantum imposed: HC (See 'Legal Desk') Experts deliberate on WTO Fisheries Subsidies Pact & Implementation Challenges (See 'Corp Brief') Companies Act - Admission of winding-up petition, appointment of provisional liquidator or liquidator, or possession of assets by liquidator does not, by itself, establish irreversibility thereof: HC (See 'Legal Desk') 7th High-Level meeting of OPEC-India Energy Dialogue held in Delhi (See 'Corp Brief') Competition - Formulation of technical specifications & procurement requirements falls primarily within domain of procuring entities, which are at liberty to set terms suited to their needs - no case of contravention of Sections 3 or 4 is made out: CCI (See 'Legal Desk') NHAI signs MoU with SSNNL to simplify Approval Framework for NH (See 'Corp Brief') PMLA - Provisional attachment order unsustainable when there is no apprehension or evidence that subject property is likely to be transferred, concealed or in some way disposed off so as to frustrate confiscation proceedings: SAFEMA Tribunal (See 'Legal Desk') Union Minister inaugurates WWF Global Conservation Conference at Jaipur (See 'Corp Brief') Ministry of MSME gears Up for Special Campaign 6.0 on Swachhata (See 'Corp Brief') SECI celebrates 15th Foundation Day with Stakeholders' Meet (See 'Corp Brief') A&C - Agent cannot claim cross-contractual lien over principal's property for dues arising under separate agreements in absence of express contractual provision permitting such retention: HC (See 'Legal Desk') Coal India advances Technology-led Diversification Across Energy & Minerals (See 'Corp Brief') Digital India RISC-V Grand Challenge under C2S Programme awarded to 3 teams (See 'Corp Brief') IBC - Arrangement of funds to enable corporate debtor to clear its liabilities, coupled with transfer of funds from cooperative bank loan account of applicant directly to bank, is not valid loan disbursement under IBC: NCLT (See 'Legal Desk') Vaishnaw highlights ISM 2.0, indigenous design, manufacturing, talent and India's emergence (See 'Corp Brief') SEBI - SEBI, acting as statutory market regulator, is duty-bound to issue a reasoned, speaking order when a decision carries serious civil consequences for acquirer, target company & investors: SAT (See 'Legal Desk') An unsuccessful 'success fee' litigation (See CORP EINSICHT)

Pre-listing Bonuses or Splits: An 'Albatross around the neck' of non-resident investors

Published: Aug 13, 2021

By Puneet Jain, Joint Partner & Devashish Jain, Associate in Lakshmikumaran and Sridharan

THE recent IPO announcements by startups in India will bring cheers to existing investors in these companies. However, the possible tax implications arising out of certain internal rearrangements in the shareholding in the run upto the IPO could be seen as an 'albatross around the neck' of investors, especially for those located in Mauritius and Singapore.

Presently, gains derived by Mauritius and Singapore residents from the sale of shares of an Indian company, acquired prior to April 1, 2017, are grandfathered. Accordingly, such gains are not subject to tax in India. However, this position can quickly undergo a change when companies eyeing for IPO issue additional shares to their existing shareholders to bring down their per-share price to make IPO attractive for retail investors.

Broadly speaking, a company can reduce its per-share price either by issuing 'bonus shares' or by announcing a 'stock-split'. The article aims to analyze the income-tax implications associated with these two options from the standpoint of investors resident in Mauritius or Singapore.

A. Bonus Shares

Bonus shares are additional shares given to the existing shareholders of a company on a free-of-charge basis. Investors in companies issuing bonus shares will have the following queries:

1. Whether bonus shares would qualify as a new capital asset?

2. What will be the date of acquisition of such bonus shares?

3. Whether grandfathering benefit under Mauritius or Singapore tax treaties will be available on such bonus shares?

Since the aforesaid queries are interlinked, it is important to conclude on the first two queries, as their conclusions will be a determinative factor in answering the last query.

From a domestic law standpoint, it is now a settled proposition of law that bonus shares shall qualify as a new capital asset. This is primarily due to the fact that they represent "additional share in the increased capital" and "confer title to a larger proportion of the surplus assets at general distribution" 1 . Accordingly, the date of acquisition of these bonus shares shall be seen from the date of their allotment itself 2 .

That being said, it's possible to argue that what stands received by shareholders is merely a split of shares out of his holding 3. Thus, no new property is received in the captioned scenario. However, it is a highly contentious issue, especially in light of the existing jurisprudence.

Resultantly, the issuance of bonus shares may have huge capital gains implications in the hands of non-resident investors resident in Mauritius and Singapore. This is because the bonus shares will be considered to be acquired post-April 1, 2017 upon which no grandfathering benefit would be available under tax treaties.

B. Stock- Split

Stock-split is a corporate action to increase the number of outstanding shares by replacing the existing shares with those having lower denomination and thereby lowering the per-share value in the hands of the shareholders. As an alternative to issuing bonus shares, companies eyeing an IPO can explore 'stock-split' route to lower their per-share price. However, from an investor's standpoint, questions may arise with regard to stock-split similar to those in the case of bonuses.

From a domestic law standpoint, there is very little guidance in the form of judicial precedents on tax implications on share split. However, from the overall scheme of the act 4, it is possible to argue that a mere division of already existing shares into shares of the lower denomination cannot be said to result in emerge of a new capital asset 5. This is because the division/split does not affect the interest of the shareholders in the company. Accordingly, the date of acquisition of the shares received upon stock-split shall be reckoned as the date of issuance of original shares.

That being said, considering the quantum of tax involved, the taxman is likely to contest the aforesaid interpretation. In this regard, they will draw inference from bonus shares to argue that shares issued after stock-split are also new capital assets and accordingly, no grandfathering benefit would be available on such shares. In such an eventuality, the matter may have to be litigated before courts.

Concluding Remarks

As can be seen, both 'bonus shares' and 'stock-split' have their fair share of challenges from an Income-tax perspective. Thus, it boils down to choosing the option with lower risk and higher chances of success in a possible litigation, after considering all the pros and cons. The intent of legislation seems to be ironclad when it comes to bonus shares. Thus, companies eyeing an IPO can consider 'Stock-split' instead of 'bonus shares' to reduce per-share price and help non-resident investors from Mauritius and Singapore to safeguard their grandfathering benefit under treaties.

(Views expressed are strictly personal.)

1CIT v. Chunilal Khushaldas MANU/GJ/0005/1972.

2 Section 2(42A)(f) of the Income-tax Act 1961; Circular No. 717 dated 14-8-1995; and Manecklal Premchand v. CIT MANU/MH/0156/1989.

3 Sudhir Menon v. ACIT MANU/IU/0290/2014.

4Section 55(2)(b)(v) of the Income-tax Act 1961.

5Harish Mahindra / Keshub Mahindra v. CIT [1981] 7 Taxman 89 (Bom.).

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