TRAI organises Workshop for rating of Properties for Digital Connectivity (See 'Corp Brief') Promote innovation in agriculture and organic farming: Chouhan (See 'Corp Brief') IPR - If trader imports and sells goods bearing trademark of another company, such trader can't sue another authorized dealer of trademark holder for infringement: HC (See 'Legal Desk') India charts bold upstream Energy Strategy at Urja Varta 2025 (See 'Corp Brief') IPR - Merely placing slogan prominently on goods/ advertisements, does not suffice to establish same as source identifier, unless consumers associate that phrase uniquely with such goods/ services: HC (See 'Legal Desk') Giriraj Singh inaugurates India Trend Fair 2025 in Tokyo (See 'Corp Brief') SEBI - Accrual of interest upon default is automatic and flows from nature of liability serving to compensate for time value of money and disruption caused by delayed payment, rather than to impose additional punitive burden: SC (See 'Legal Desk') Indian Culinary Institute kicks Off orientation for BBA and MBA Culinary Arts Students (See 'Corp Brief') NI Act - Complaint u/s 138 for dishonour of cheque issued in name of partnership firm is maintainable against individual partners of firm, even when partnership firm is not arrayed as accused: SC (See 'Legal Desk') National Zoological Park Observes World Snake Day (See 'Corp Brief') A&C - Communications between parties through WhatsApp and e-mails can constitute valid arbitration agreement: HC (See 'Legal Desk') Giriraj Singh begins official visit to Japan (See 'Corp Brief') 'Ease of Doing Research & Development' held at Indian IIT, Jammu (See 'Corp Brief') Competition Act - allegations relating to procedural lapses, such as non-publication on GeM & relaxation of bid conditions, do not fall within the scope of anti-competitive behavior under the Act: CCI (See 'Legal Desk') NHAI Report highlights Initiatives taken for Environment Sustainability (See 'Corp Brief') CCI okays acquisition of 100% shareholding in SMC Power by Rungta Sons (See 'Corp Brief') CCI okays acquisition of Target Business from SGRE and SGREL by PPPL, TPG REGen (See 'Corp Brief') IPR - Official broadcasters of FIFA World Cup 2025 are granted injunction against illegal streaming by rogue website: HC (See 'Legal Desk') MNRE has provided over Rs 200 Cr funding to NCPRE, IIT Bombay over 15 years (See 'Corp Brief') BCCL pioneers Women Empowerment in Healthcare and Technical Domain (See 'Corp Brief') Scindia charts Vision for Grassroots-Driven Growth at India Post Business Meet (See 'Corp Brief') Murmu to confer Swachh Survekshan 2024-25 awards (See 'Corp Brief') PMLA - Where appellant's funds were already in ED's possession, there is no longer any need to continue the debit freeze & appellant can operate the relevant bank account: HC (See 'Legal Desk') President's discretionary grant of Rs 62.4 lakh disbursed to meritorious EMRS Students (See 'Corp Brief') IPR - Patents Act does not impose any bar on amendment of patent application or specification at appellate stage: HC (See 'Legal Desk') Mandaviya announces 'Youth Spiritual Summit' in Varanasi (See 'Corp Brief') Misc - Land Acquisition Collector can't be said to had tendered compensation to recorded owner of subject land, simply based on notice of award u/s 12(2) of LA Act, in absence of communication inviting landowners to receive compensation : HC (See 'Legal Desk') Gadkari lays foundation stone for 9 NH projects in Karnataka (See 'Corp Brief') A&C - Merely pointing to existence of arbitration clause, without invoking statutory remedy u/s 8, is insufficient to seek dismissal of plaint on grounds of lack of jurisdiction: HC (See 'Legal Desk') Coal India's First Fully Women-Operated Dispensary Inaugurated at SECL (See 'Corp Brief') IPR - 'PLUTO' remains dominant part of both marks; Minor differences in presentation or added descriptors do not mitigate risk of confusion among consumers: HC (See 'Legal Desk') IPR - Rejection of patent application on blatantly illogical and misconceived reasoning, namely that invention was 'too simple' to qualify as patentable, was not justified: HC (See 'Legal Desk') Fifth Edition of National Startup Awards invites nominations (See 'Corp Brief')

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.).

TIOL CORP SEARCH

TIOL GROUP WEBSITES