FM asks Banks to establish sustained relationship with Young customers (See 'Corp Brief') Guwahati-Tezpur Corridor: A New Highway Link to Boost Assam's Tea, Tourism and Trade (See 'Corp Brief') Historic Turnout Marks West Bengal's First-Ever Kaushal Mahotsav (See 'Corp Brief') PMLA - Accused has no vested or matter-of-right entitlement to conversion of non-bailable warrant into bailable warrant: HC (See 'Legal Desk') CCI approves acquisition of 23% equity of TM International Logistics by Tata Steel (See 'Corp Brief') CCI nod for addl shareholding of Acko Technology by General Atlantic Singapore (See 'Corp Brief') CCI okays acquisition of equity in Bharti Life Insurance by Prudential Corporation (See 'Corp Brief') Competition Law - Collective determination of freight rates by truck associations constituted horizontal agreement that directly determined sale prices, thereby violating Sec 3(3)(a): CCI (See 'Legal Desk') Gwalior-Chambal Region to gain New Momentum with Strengthened Rail Connectivity (See 'Corp Brief') Credit to weaker sections reaches Rs 3.49 lakh crore (See 'Corp Brief') PMLA - NBFCs cannot shield themselves from liability when they allow their regulatory licenses to be used for predatory financial crimes: SAFEMA (See 'Legal Desk') Department of Youth Affairs to host BRICS Youth Council Meeting (See 'Corp Brief') IBC - Only crystallised claims as on effective date are payable on pro-rata basis from designated Operational Creditors Settlement Amount: SC (See 'Legal Desk') RDDBFI - Borrowers cannot cherry-pick figures from bank certificates while ignoring standard accounting treatment of interest after NPA classification: SC (See 'Legal Desk') IPR - Holding subsequent trademark registration does not override prior court injunction protecting visual get-up: HC (See 'Legal Desk') PSB Confluence 2026 - deposit mobilisation, banking for youth & investment cycles on agenda (See 'Corp Brief') A&C - Continuation of arbitration proceedings against some guarantors while statutory interim moratorium u/s 96 of IBC is in effect regarding 'debt' violates fundamental policy of Indian law: HC (See 'Legal Desk') IBC - Rights issue that does not comply with the mandatory timing and procedural requirements under company law, and which reduces majority shareholders into minority and transfers control, constitutes oppression: NCLT (See 'Legal Desk') DFS highlights mechanism for Timely Redressal of Insurance Policyholders' Grievances (See 'Corp Brief') CCRAS-NIIMH signs MoU with Sevadhi Museum and Indological Research Institute for Digitization (See 'Corp Brief') IBC - Second proviso to Rule 30(9) of Companies (Incorporation) Rules, 2014, acts as mandatory statutory bar, which prevents Regional Director from allowing shifting of registered office while appeal against resolution plan is pending: HC (See 'Legal Desk') Over 2 Lakh Villages, Now 'Har Ghar Jal' Certified (See 'Corp Brief') Companies Act - Assets of a company belong to the entity and its creditors, not its shareholders; transfer of company assets seemingly to place them beyond creditors' reach is impermissible: HC (See 'Legal Desk') MSDE convenes India-Japan Stakeholder Consultation to strengthen skilling (See 'Corp Brief') Competition law - Dealership termination, even if commercially harsh, does not by itself become competition law violation unless there is material showing an anti-competitive agreement causing dominance and abuse: CCI (See 'Legal Desk') Naidu flags off Tiranga Rally under Har Ghar Tiranga Campaign 2026 (See 'Corp Brief') IBC - EPC contract cannot be said to be frustrated by efflux of time merely because works have been suspended due to non-payment: SC (See 'Legal Desk') Capital Market - Trading while in possession of Unpublished Price Sensitive Information automatically triggers insider trading liability: SC (See 'Legal Desk') States recognised for Strong Performance in Anemia Mukt Bharat Abhiyaan (See 'Corp Brief') Misc - Winding-up proceeding and civil suit for recovery of money are distinct and independent remedies, and initiation of one does not impact limitation for other: SC (See 'Legal Desk') Patents - Invoking common general knowledge as basis for rejecting patent application without identifying & substantiating source of such knowledge is impermissible in a quasi-judicial order u/s 15 of the Act: HC (See 'Legal Desk') Gaj Gaurav Awards 2026 conferred for Exemplary Contributions to Elephant Conservation (See 'Corp Brief') IPR - In infringement action u/s 29(2)(b) of Trade Marks Act, where marks are similar but not identical, burden lies strictly on plaintiff to establish that similarity is likely to cause confusion: HC (See 'Legal Desk') Competition - Business model of online food delivery inherently differs from direct restaurant sales - price differential between two does not per se establish abusive conduct per the Competition Act: CCI (See 'Legal Desk') Tete-a-tete around AI in banking sector often begins with algorithms (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.).

TIOL CORP SEARCH

TIOL GROUP WEBSITES