Corporate biggies & few HNIs take bonus-stripping route to cut tax outgo for current fiscal
November, 01st 2012
Corporate treasuries, desperate to make a little more money in a difficult market, are believed to be pushing some of the asset management companies (AMCs) to offer bonus units that can be traded to lower tax. Bonus units in debt plans a favourite of many treasurers help companies set off gains against 'managed' losses arising out of a strategy known as 'bonus stripping'. The trade involves investors buying fund units before the record date, pocketing the bonus units and then selling the original units (bought before the bonus record date) at a lower net asset values (NAV) (which drops post bonus).
An analysis of the asset build-up of several bonus plans suggests that corporates and a few bulge-bracketed rich investors are finding ways to prune tax outlay for the year. At present, offerings by at least two funds are being tracked by treasurers. The asset base of a treasury advantage fund managed by a large-sized fund house has grown from just about .
Rs6,600 crore in June to about.Rs12,500 crore in September. Another fund in play is the income fund managed by a leading fund house the assets of which have grown from just about .Rs300 crore in April to over.Rs600 crore in September. According to industry sources, both the funds are witnessing significant interest from corporate investors as they expect bonus issues in the near-term.
"There is nothing illegitimate about bonus-stripping," said Dhirendra Kumar of fund research firm Value Research. "It is just a very tactical way of reducing tax payouts. Also, it does not impact any specific investor class as such funds are only sold to investors who have such needs," he said.
The modus operandi is simple. Suppose, an investor buys 10,000 fund units at a net asset value of .Rs20 a unit, involving an investment of.Rs2,00,000; the fund announces a bonus issue of 1:1. On the record date, the NAV of the units of the mutual fund scheme is .Rs21 per unit. On receiving the 10,000 bonus units, the total number of units of the mutual fund scheme held by the investor would be 20,000. Consequently, the NAV of the units post the bonus issue will drop from .Rs21 per unit to.Rs10.50 per unit.
A few days later, the investor sells the units it bought at .Rs20 a unit at post-bonus NAV of around .Rs10.50. This transaction is shown as portfolio loss because the investor had originally purchased the fund units at .Rs20 (even though the investor retains the bonus units). This notional or 'managed' loss is used to set off short-term capital gains made else where in the investors' portfolio.
As per Value Research data, UTI Mutual, CanaraBSE 0.16 % Robeco, Deutsche Mutual and Franklin Templeton Asset Management, among a few others, have announced bonus offerings since April. A few other leading fund houses may announce bonus issues in their liquid and money market schemes over the next one month, said a distributor
"If the fund house is offering strategies within the regulatory framework, it is perfectly fine. However, fund houses should protect the in-terest of other investors in the fund," said Ashvin Parekh, partner & national leader ( financial services), Ernst & Young.
Apossible understanding between the asset manager and the corporate treasury starts when the former sounds out the probable bonus issue record dates, prior to which the companies will have to invest in the fund. As per statutes, investors who have remained invested in the fund for three months are entitled to get bonus units. According to distributors, bonus-stripping will gather pace in the coming months as investors start tax planning for the fiscal.