The Securities and Exchange Board of India (Sebi) is learnt to have given its final recommendations on the Union Budget proposal of imposing a capital gains tax on shares acquired without paying Securities Transaction Tax (STT).
According to sources, the markets regulator has emphasised the need to exempt inter-promoter and inter-family transactions from such provisions, along with employee stock options (Esops). And, recommended imposition of capital gains tax on 'off-market' transactions-share transfers between entities outside the stock market platform.
The Union finance ministry has said certain transactions like shares bought in an Initial Public Offer or gained through a bonus or rights issue-where typically STT is not paid-will be exempt from capital gains. The Centre is expected to finalise an exhaustive list of exemptions in the next two weeks, as the new regulations will come into effect from April 1.
Applicability of this Budget proposal had created uncertainty among market players. Sources say the Centre has been consulting Sebi and other stakeholders, such as legal experts and tax consultants.
Sebi's stand on inter-promoter holdings could provide some respite in the Street. A lot of promoters have already rushed to carry out transfers between themselves, to avoid higher taxation. Legal experts say some companies are waiting for more clarity on the issue before deciding their next move.
"Sebi has recommended all transactions under Section 47 of the Income Tax Act be exempted from capital gains tax, as the nature of these transactions is not commercial," said a source. Section 47 deals with non-commercial transactions, such as gifts or transfer of assets within a family or a company.
The regulator also wants leeway for shares acquired through an Esops programme, a key incentive mechanism for India Inc.
Market participants a key aim of the Budget proposal is to curb off-market transactions, often exploited to acquire shares at less than fair value and circumvent payment of STT. "The idea is to target such types of transactions and exempt genuine cases," said Amit Singhania, partner, Shardul Amarchand Mangaldas.
On foreign portfolio investors (FPIs), Sebi has also sought exemptions in so-called free of cost (FOC) transfers. These are typically transfers made within funds for restructuring purposes or in the case of an event like a merger or acquisition. For instance, FPI-A has acquired FPI-B and ownership of all securities owned by A need to be transferred to B.
"There are lots of practical cases where a fund acquires another or is merged with another fund owned by the same FPI. Such cases are genuine and relaxation should be provided," said Rajesh Gandhi, partner, Deloitte Haskins and Sells.
Experts say these anti-abuse provisions have the spirit of retrospective regulation, as they'd bring transactions done right from 2004 under the ambit. This is a big concern for private equity (PE) and venture capital (VC) investors, as they didn't envisage such provisions while taking their investment decisions, especially in the unlisted space.
"These investors typically enter a company with a particular investment horizon and broad sense of timing of exit. Such timelines are usually based on their calculation of expected returns and are usually a part of their shareholder agreements. Imposing capital gains all of a sudden could impact such decisions" said Sai Venkateshwaran, partner at KPMG in India.