Taxing time for some in HUL offer

MUMBAI: Investors participating in India’s largest buyback programme — Unilever Plc’s Rs 29,000-crore offer for increasing its stake from 52.5% to 75%, the maximum that a promoter can hold in a listed company, in FMCG major Hindustan Unilever ( HUL) — may face some taxing times. This is because while all shares held for more than a year and sold through brokers on the exchange are exempt from capital gains tax, buybacks, where the shares are directly tendered to the company bypassing the stock exchange, attract capital gains tax.


“Long-term capital gains are exempt only in respect of sale of equity shares, which are held for a period of at least 12 months, on a stock market transaction where STT at 0.1% is payable by the seller,” says a tax expert. Short-term capital gains, arising in case of sale of listed securities held for less than 12 months, do not enjoy capital gains exemption . Here, tax is payable as per the applicable income tax slab, the highest being 30% (basic rate).

However, in case of open offers by the promoters at fixed prices, even the longterm capital gains, in the hands of the shareholder opting for the open offer, is taxable at lower of 10% of the capital gains computed without cost indexation, or 20% of the gains computed with cost indexation. The exact quantum of capital gains, on which tax is payable by such shareholders, would depend on the cost at which they had originally acquired these shares.

So, is there any way out for investors? “Investors holding HUL shares who are eligible to enjoy long-term capital gains tax should sell the shares in the market, buy it back from the market and then tender the shares in the open offer,” said Arun Kejriwal, director, KRIS, an investment advisory firm. This is how the strategy works. On Tuesday, HUL shares on the BSE closed at Rs 588, compared to the open offer price of Rs 600. Let us assume the cost of acquisition of the shares by an investor was Rs 200. Now, if such investor sells the share in the open market, he doesn’t pay capital gains tax on the difference of Rs 387 (Rs 587 minus Rs 200), but only a marginal STT on the value of the sale.

If however, the same investor were to accept the open offer, his capital gains would be Rs 400 (Rs 600 minus Rs 200). Without indexation , the capital gains tax at 10% would be Rs 40 and he would get in his hands a comparatively lower net proceed of Rs 360. The immediate reaction thus would be to sell in the open market and avoid capital gains tax.

However, savvy investors can take things a step forward. Now after selling his old holdings in the open market, the investor can again repurchase the shares back at Rs 584 (assuming the market price has remained unchanged). He can then opt for the open offer of Rs 600. The short term capital gain for him would be only Rs 16 (Rs 600 minus Rs 584, which is now his cost of acquisition ) on which the highest tax @30% basic would be around Rs 5.

Thus in case of a directly opting for the open offer the capital gains tax would be Rs 40, whereas by resorting to sale in the open market, repurchase of the shares and opting for the open offer the capital gains tax reduces to Rs 5.

In this way the investor can benefit from tax arbitrage . “While there are no specific provisions, such a modus operandi adopted by an investor could be treated as a tax evasion exercise by tax authorities,” cautions a chartered accountant.

However, according to Kejriwal, investors must submit in the offer because “the price is very good and if the India story has to suffer for some more time, HUL’s stock price will also come down post the buyback.”