The promoters of drug maker Ranbaxy Laboratories face the unwelcome prospect of paying around Rs 1,000 crore by way of capital gains tax to the government exchequer. The Securities and Exchange Board of India (Sebi) has rejected a plea from the promoters of Ranbaxy for a wavier of rules applicable to block deals through the stock exchanges. The proposed deal was intended to transfer the Singh familys 34.82% stake in Ranbaxy to Japanese drug firm Daiichi Sankyo.

The company had approached the regulator seeking relaxation of norms related to block deals. However, Sebi cannot relax the norms for one company since it will send a wrong signal, Sebi officials said. Ranbaxys CEO and MD Malvinder Singh declined to comment when asked whether he would now opt for an off-market transaction.

In June this year, Japanese drug firm Daiichi Sankyo had acquired over 34% stake in Ranbaxy for Rs 9,576.3 crore. Daiichi paid a negotiated price of Rs 737 per share to Ranbaxy promoters. However, the global liquidity crunch and Ranbaxys problems with US regulators have pulled the share prices of the company down to Rs 266, a drop of 64%. Ranbaxy had sought Sebis approval to execute the deal at Rs 737 a share through the stock market. This permission has been denied by Sebi since there is a huge difference between the deal price and the current market price. When contacted, a Ranbaxy spokesperson said: The deal is very much on track and will happen as scheduled. However, the official declined to respond to queries on whether the company would execute the transaction off-market or how it plans to complete the stake transfer. The company also declined to comment on whether it planned to seek a fresh approval from the regulators.

An e-mail sent to Daiichi Sankyo asking how it plans to complete the transaction and whether the company is willing to opt for an off-market transaction remained unanswered at the time of writing. In its application to the foreign investment promotion board (FIPB) in June this year, Daiichi Sankyo had sought the governments permission to acquire the promoters 34.8% stake on the stock exchange.

Ranbaxys promoters were keen to use the block deal route to sell their stake to Daiichi. Through this window, they can sell their shares through the stock exchange without being bound by price restrictions applying to a bulk deal and without having to pay long-term capital gain tax of around Rs 1,000 crore.

Unlike an off-market transaction, which attracts a 10% long-term capital gains tax in addition to 1% surcharge and an additional 3% tax on the surcharge, any transaction routed through the stock exchanges do not attract capital gains tax. A deal through the stock market will mean that Ranbaxys promoters will have to pay a nominal securities transaction tax of 0.125% in addition to brokers fee and 12.5% service tax (on the brokers fee), which could run into a few crores.

According to one school of thought, it is possible that Ranbaxy may have to go back to the Cabinet Committee On Economic Affairs (CCEA) to get approval for an off-market transaction since the latters approval was for a transaction through the stock exchange. However, a prominent lawyer ET spoke to said this would not be necessary. With Sebi rejecting the block deal option, the promoters have to pay the capital gains tax. However, it is not necessary to go back to the FIPB and CCEA to go in for an off-market deal since these authorities give general approval on investments in India, Akil Hirani, managing partner, Majmudar & Co said.

However, Ranbaxys troubles are unlikely to have any major implications for future M&As in India Inc. It is a one-off transaction that got caught in the ongoing liquidity crisis and would not probably have any impact on similar deals in the future, said PricewaterhouseCoopers executive director Sanjay Hegde. Referring to the norms, sources in the know said the agreement between Ranbaxy promoters and Daiichi Sankyo has a clause which says that promoters holding would be sold through a stock exchange transaction. A stock exchange transaction of this kind can be done either through a block deal or a bulk deal.

A block deal must be done at a price which is close to the existing market price. There is a time period, between 9.55 am and 10.30 am, during which block deals can be executed. A Sebi circular issued in September 2005 says that a trade with a minimum quantity of 5 lakh shares or having a minimum value of Rs 5 crore, executed through a single transaction on the stock exchange, will constitute a block deal. A block deal is subject to conditions like time period of trade, delivery-based trading and more significantly, a price range which should not be deviated by more than 1% from the closing price of the stock on the previous day.

However, in the case of Ranbaxy, the scrip is currently trading much lower than the negotiated price of Rs 737. Therefore, Ranbaxy promoters would be able to sell their shares to Daiichi Sankyo through a block deal, only if the share price rises by as much as 64% from the closing price of Rs 266 at BSE on Thursday or if Sebi agrees to waive the 1% requirement.

With Sebi rejecting the block deal route, the transfer of management to Daiichi will be delayed further. However, analysts tracking Ranbaxy expressed optimism. The deal will go though off-market and the promoters will pay the capital gains tax. The promoter wants to invest more in real estate and Religare. an analyst said.