National Orientation Programme for Tribal Healers on Public Health held in Hyderabad (See 'Corp Brief') CSIR-NIScPR organises third International Conference on Dissemination of Traditional Knowledge (See 'Corp Brief') A&C - Judicial intervention in arbitral proceedings is warranted only in exceptional cases, such as where party is left remediless under the statute or where clear bad faith is established: HC (See 'Legal Desk') WCL emerges as Growth Engine of Coal India, Records Strong Growth in Production (See 'Corp Brief') DPIIT implements Special Campaign to minimise Pendency Across Offices (See 'Corp Brief') SEBI ACT - Provisions of SEBI (Prohibition of Insider Trading) Regulations are violated where an employee of the Company, possessed & communicated Unpublished Price Sensitive Information regarding its forthcoming financial results to an outsider who then traded in company's shares based on such information: SAT (See 'Legal Desk') CCI approves acquisition of certain stake in Vodafone Group PLC by Vega SAS (See 'Corp Brief') CCI approves acquisition of equity of Solenergi Power by Aditya Birla Renewables (See 'Corp Brief') CCI approves acquisition of certain shareholding in Navi Ltd by MIH Payments (See 'Corp Brief') Insolvency and Bankruptcy Code, 2016 - A post-admission settlement can automatically bypass statutory mechanism mandated under Section 12A of the IBC, 2016, particularly in light of stringent amended provisions governing withdrawal of admitted applications: NCLAT (See 'Legal Desk') CCI approves acquisition of equity share capital of IntelliSmart Infrastructure by Adani Energy (See 'Corp Brief') CCI approves merger of Sapphire Foods India with and into Devyani International (See 'Corp Brief') 87 Crores Individuals Screened for Oral, Breast and Cervical Cancers (See 'Corp Brief') Insolvency and Bankruptcy Code, 2016 - Liquidator's claim for refund cannot be adjudicated in the summary jurisdiction under Section 60(5) of the Code, more so where the parties' claims have not been crystallised through adjudication: NCLT (See 'Legal Desk') India-BLEU Joint Economic Commission Session Held in Luxembourg (See 'Corp Brief') India to promote South-South Cooperation and share Agricultural Innovations (See 'Corp Brief') Companies Act, 2013 - Pendency of challenge to a judgment before a Division Bench does not extinguish its binding force, where judgment is neither set aside nor stayed: HC (See 'Legal Desk') Of 137 commercial mines allocated since 2020, 25 are producing (See 'Corp Brief') MoS releases Foreign Language Compendium of DRDO Products for engagement with international partners (See 'Corp Brief') Trade Marks Act, 1999 - Court's intervention is needed where the parties furnish affidavits making undertakings that effectively resolve the issues at hand: HC (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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