Sebi seeks easing of Budget’s STT proposal

Regulator sends list of transactions that could be kept out

The Securities and Exchange Board of India (Sebi) has sent a list of market scenarios that can be kept out of the Union Budget’s proposal of levying capital gains tax on transactions of shares that were acquired by not paying the securities transaction tax (STT).

According to sources, the market regulator has recommended to the finance ministry that transfer of shares on account of inheritance, restructuring within companies and employee stock options (Esops) can be part of the exempt list. Some of the transactions involving foreign funds made without any consideration can also be included in the list, Sebi has said.

Sebi has not raised any reservations over providing relief to transactions such as acquiring shares through initial public offerings (IPOs) or through a bonus or rights issue, where typically the STT is not paid. These types of transactions were suggested in the Finance Bill by the government.

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.

This Budget proposal had created an 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. Many promoters have already rushed to carry out transfers among 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 say 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 the STT. The regulator is learnt to be in favour of taxing off-market share transfers.

“Generally, off market transactions remain unregulated and these transactions can be done at less than fair value. The idea is to target such types of transactions and exempt genuine cases,” said Amit Singhania, partner, Shardul Amarchand Mangaldas.

For foreign portfolio investors (FPIs), Sebi has sought exemptions in the 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 will bring all transactions done after 2004 — since the introduction of STT— under their ambit.

This is a big concern for private equity (PE) and venture capital (VC) investors, as they did not 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 a 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.