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A Tax Efficient way to sell Shares

From July 1, retail investors can offer stocks through exchanges for delisting, buyback and open offers

Offering shares to a company that is going to de- list or offering a buyback has always been cumbersome for small investors. The firm sends a letter to your address, giving details and price of the offer, asks you to fill a form, sign it and then send it back by post. The company, then, submits the application to the broker and makes a claim.

If an investor has been holding shares for decades, there's always fear of signature mismatch, misplacement of forms, and then there's capital gains tax as these are not routed through the exchanges, called off- market transactions.

To do away with the archaic system and make these transactions more profitable for investors, the Securities and Exchange Board of India ( Sebi) has introduced a new mechanism. The stock markets regulator recently issued a circular that companies making public announcements for de- listing, buybacks and open offers, July 1 after will have the option to route their purchases via stock exchanges. The traditional process, too, will continue and it will be up to the firm's discretion to choose between the two.

If a company goes for stock exchange option, the process will entirely be paperless and more tax efficient.

It will be just like buying and selling stocks using the existing trading account during the market hours. This process also significantly reduces the time taken for such offers.

The trades shall be carried out in the manner similar to settlement of trades in the secondary market process including providing an option for direct payout to the shareholders. This would include settlement of trades of physical shares as well. Excess shares, if any, would be returned to the seller brokers by clearing corporation.

The biggest benefit, however, of this new mechanism is lower tax outgo for long- term investors. Once the company starts adopting this route, investors who have stayed with the firm for a year won't need to pay any long- term capital gains (LTCG) tax. Income- tax rules say that the person who pays securities transaction tax doesn't need to pay LTCG.

Currently, when an investor tenders shares in de- listing, buybacks, or open offers that are at pre- determined price, he ends up paying LTCG tax, which works out to 10 per cent or 20 per cent with indexation benefit ( whichever is lower). For example, if a person is making profit of ₹ 1 lakh by offering shares while a company is de- listing, he would need to pay up to ₹ 10,000 as tax. The short- term capital gains would still apply, wherein the gains are added to the income and taxed according to the slab.

According to experts, the only drawback is a lack of clarity whether the payment will be made to the shareholder through the broker or directly via cheque or bank transfers. Routing through brokers can cause delays of funds reaching the client

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