Latest Expert Exchange Queries
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
Popular Search: due date for vat payment :: form 3cd :: articles on VAT and GST in India :: empanelment :: ARTICLES ON INPUT TAX CREDIT IN VAT :: cpt :: VAT Audit :: Central Excise rule to resale the machines to a new company :: TDS :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: ACCOUNTING STANDARDS :: VAT RATES :: list of goods taxed at 4% :: ACCOUNTING STANDARD :: TAX RATES - GOODS TAXABLE @ 4%
General »
 Tax and the dilemma of the self-employed
 Banks warn share tax hike threatens Paris' post-Brexit appeal
 PMC may decide on property tax rebate for IT firms this week
 I-T Dept is giving out certificates of appreciation. Have you received yours?
 Government works on ironing out benefits refund mechanism for exportersa
  Tax officials are using an IDS provision to question transactions beyond six-year-limit
 Tax-free bonds rally like midcap funds
 Senior citizens do not have to pay advance tax on salary and interest income
 GST: Audit commissioners to get adjudication powers
 Interest on NRE rupee account can be exempt from tax under FEMA
 Impact of GST on Real Estate Sector

Merger tax-neutral for RPL shareholders
March, 04th 2009

The merger of Reliance Pertroleum (RPL) with Reliance Industries (RIL) is the latest in a long string of amalgamations and mergers that have taken place over time in the Reliance group.

As per the arrangement announced by RIL, RPL shareholders of RPL will get one share of RIL for every 16 RPL shares held by them. Though the merger is effective April 1, 2008, the record date, i.e. the actual date when the shares will be swapped, hasn't been announced yet. When the announcement does come in, RPL shareholders will own RIL shares in lieu of their RPL shares.

Would such a share swap entail any tax consequences?
Is capital gains tax payable?

What about cost of acquisition and period of holding?
This week's article examines these and other related issues.
First and foremost, from the tax point of view, RPL will be the amalgamating company, while RIL will be the amalgamated company.

As per the provisions of Sec. 47(vii) read with Sec. 49(2), any transfer by a shareholder in a scheme of amalgamation of shares held by him in the amalgamating company shall not be regarded as transfer if-

a. transfer is made in consideration of allotment to him of shares in the amalgamated company ; and

b. amalgamated company is an Indian company.

What this means is that any exchange of shares held in the amalgamating company (RPL) will not be considered as a sale and consequently there will be no capital gains/ loss as long as the transfer is made in consideration for being allotted shares in the amalgamated company (RIL).

Moreover, the cost of shares of RPL will be considered as the cost of shares of the new shares allotted of RIL.

Readers would know that in order for shares to qualify as long-term assets and consequently as long-term capital gains upon sale, they have to be held for over 12 months.

Now, in this case, to ascertain whether the freshly allotted RIL shares are long-term or not, the period of holding of RPL shares would also be considered.

Indexation however, will start from the date of allotment of RIL shares.

Let's understand all this in terms of an example.
Let's say Vishal has acquired 400 shares in RPL on December 15, 2008 @Rs 90 per share. Therefore, his total cost is Rs 36,000 (Rs 90 X 400 shares). Now, on the record date, his holding of 400 shares in RPL will be converted into 25 RIL shares (400/ 16). His total cost remains the same, i.e. Rs 36,000, yielding a net cost per RIL share of Rs 1,440 (Rs 36,000/ 25 RIL shares).

Let's say, going forward, Vishal sells his holding of 25 RIL shares on December 31, 2009 at Rs 1,600 per share. He would get Rs 40,000 on selling the shares. The capital gain earned would be Rs 4,000 (Rs 40,000 less Rs 36,000). Also, though he has technically held the RIL shares for less than 12 months (from record date which will be on or after April 1, 2009 till December 31, 2009), since the period of holding of the erstwhile RPL shares has to be aggregated, this capital gain would be long-term in nature and hence free of tax.

In the above illustration, the example of a shareholder who holds RPL shares that are an exact multiple of 16 has been used for ease of understanding,. But in real life, this may not be so. What if one holds only 15 shares or perhaps 200 or even 300 -- in short a number that is not exactly divisible by 16 such that you get a precise round figure of RIL shares.

Though it is not clear from the terms so far, in all probability RIL would compensate for the fractional shareholding in cash.
In this regard, in the case ofGautam Sarabhai Trust, 173 ITR 216 the Gujarat High Court held that if besides shares, the shareholders of the amalgamating company are allotted something more in exchange like say bonds or cash, etc., then the swap will not get the benefit of exemption from capital gains.

However, experts are of the opinion that the above ruling is applicable only in cases where the offer for shares plus cash / bonds is a part and parcel of the terms of the merger itself and not where the cash comes into the picture only to account for fractional ownership. For example, if the offer were one RIL share plus say Rs. 50 in cash for every 16 shares of RPL, the swap would be considered as a transfer and capital gains tax would apply. But since the offer is of one RIL share only (and nothing else) for every 16 shares held and cash, if at all, comes into play because fractional shares cannot be offered, the spirit of the law isn't revoked and hence there would be no capital gain.

Conclusion? The RIL-RPL merger will be completely tax neutral for all shareholders of RPL.

Home | About Us | Terms and Conditions | Contact Us
Copyright 2016 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
SEO Company Search Engine Optimization Company US SEO Local SEO Company Website SEO Company Alabama SEO Company Alaska SEO Company Arizona SEO Company Arkansas SEO Company California SEO Company Colorado SEO Company Connecticut SEO Company Delawa

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions