Shareholders of Ranbaxy are bound to be concerned about the tax implications, if any, arising on the share-swap in the Ranbaxy-Sun Pharma deal. Under the arrangement, Ranbaxy shareholders will receive 0.8 shares of Sun Pharma for each share of Ranbaxy. This exchange ratio represents an implied value of Rs 457 for each Ranbaxy share — a premium of 18% to Ranbaxy's 30-day volume-weighted average share price and a premium of 24.3% to Ranbaxy's 60-day volume-weighted average share price, computed as on the closing date of April 4.

Sun Pharma's official release adds, "The transaction is expected to represent a tax-free exchange to Ranbaxy shareholders who are expected to own 14% of the combined company."

No transfer under tax laws

The share-swap transaction, wherein for one share of Ranbaxy shareholders will get 0.8 shares of Sun Pharma, is not considered as a 'transfer' under tax laws and no capital gains will arise in the hands of the Ranbaxy shareholders.

Hold allotted Sun Pharma shares for 12 months

Long-term capital gains on sale of shares via a stock exchange are currently exempt from capital gains tax and only a nominal securities transaction tax is payable. However, to qualify as a long-term capital asset, the share must be held for twelve months.

"Tax laws, while defining long-term capital assets, also provide for beneficial treatment to shareholders covered under merger agreements in respect of their new shares, by including the period of shareholding of the original shares," explains Punit Shah, co-head (tax) at KPMG.

In other words the period of holding of the original Ranbaxy shares would also be considered. Thus, assuming that Mr. A had purchased 100 Ranbaxy shares in January 2012, he will now get 80 shares of Sun Pharma. If he sells the Sun Pharma shares soon after they are allotted to him, the sale will still be of a long-term capital asset (as the date for computing the period of holding will be from January 2012). Ranbaxy shareholders wishing to sell their Sun Pharma shares should ensure that the cumulative period of holding is at least twelve months, to avoid any capital gains tax. As of March 31, 2014, the general domestic public holding in Ranbaxy with nearly 533 lakh shares was approximately 13%.