BEAWARE & THINK Before You Accept An OPEN OFFER Put Forth By The Company...!

Situation:

 

Imaging a situation that you are holding a 1000 shares of a company at a prices of INR 500 per share. This makes your holdings in that stock of INR 5,00,000/-. Also, Sensex is Trading at around 20,000 levels.

 

All the things seem in you favour and you get a good news that the same company in which you have invested your INR 5,00,000/-, has declared an open offer of a buy back. Your happiness knows no bound, since buy back price is always higher than the trading price. 

 

Now, you intend to have the best of both the world's by tendering to that offer; intended to reap in better returns and realising the profit in the deal.

 

At this juncture you are unaware about the TAX BLOW that is waiting to happen if you execute the deal.

 

Real Life Example:

 

The above situation is best explained with the case of HUL (Hindustan Lever Limited), when the stock reacted the same way when open offer announcement for buyback was made by the firm. The stock price rocketed up by 17% to INR 583.60/-, when HUL announced its intention to buy 22.52% stake.

 

Share Selling Options Available & Tax Implications:

 

Sale In Open Offer: Whenever you make a sale in open offer, you have to pay tax; even if the shares were held in your portfolio for more than a year. You can not escape the tax net in this case.

 

Sale in open offer is just like any equity transaction; but is considered as a debt transaction, since there is no STT (Securities Transaction Tax) on it. 

 

Now, a long term investor who had held shares for more than 1 year and sold under open offer, may take Indexation benefit on it. That means, lower of 10% with indexation, 20 % without indexation.

 

If however, the share sale has been done in less than the year, then the share holder is taxed as per his tax slab. There will be the additional tax of surcharge tax, if the income exceeds INR 1 Crore.

 

Sale In Secondary Market: Sale in the secondary market does not attract tax on the long term capital gains, if shares have been held for more than a year. Only STT of 0.1% will have to be paid in this case.

 

For the sale made in less than a year, the gains are taxed at 15% as short term capital tax gains. This could be beneficial for those who are taxed at the higher tax bracket of 20% and 30%.

 

For Whom it is Beneficial To Go For Open Offer...?

 

Tendering to the open offer made by companies, shareholders who are in 10% income bracket or retirees who have higher taxation exemption limit will have such offers advantageous. For those falling in 30% tax bracket, secondary market sale offer is the only best available alternative available.

 

 

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BeAware of [1st June 2013] : Dividend Distribution Tax on Debt Mutual Funds hiked to 25%, will become Applicable.

DDT on debt fund investments for retail investors has been increased to 25% from 12.5%

The dividend distribution tax (DDT) on debt fund investments for retail investors has been hiked to 25% from 12.5% (plus surcharge and cess). 

DDT is the tax that debt mutual funds (MFs) pay on the dividend income distributed to retail investors. Although dividends from mutual funds are tax-free in the hands of the investor, your debt fund deducts DDT from the income earmarked for distribution, and gives the rest to investors. 

Currently, liquid funds pay a DDT of 25% (plus surcharge and cess). All other types of debt funds pay 12.5% (plus surcharge and cess) on income distributed to retail investors; and even this is now increased to 25%. 

Retirement Planning Strategy Takes A Hit:

This will be a big hit to those you use their mutual fund debt portfolio as a retirement portfolio, receiving income as dividend distributed to them on regular basis.

Hence, financial planers have a key role to take conscience of the matter and restructure retirement plans of their clients in accordance to the change that has come up.

Clients should ideally invest in growth option with more than a year of horizon in mind. This way they will be able to have the indexation benefits. hose who need regular incomes to be withdrawn from the portfolio, may opt for SWP (Systematic Withdrawal Plan).

However, in case of corporates, DDT paid by all types of debt funds continue to be at 30%. 

A Word Of Caution:

Has your advisor / advisory changed debt funds from DIVIDEND to GROWTH Option. It Not, DO IT BEFORE 1st June ' 2013.

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RBI is responsible for the development of the Government Securities market. Although, debt market in India is not matured; but RBI is taking steps in the good direction to address key concerns.

 

What Are Inflation Indexed Bonds:

 

In the developed debt markets, such as, United Kingdom, USA, New Zealand, Canada, Sweden, and South Africa the Inflation Indexed Bonds issued by the Government are one of the popular debt instruments. These Governments undertake issuance of the bonds at a regular interval with an aim to:

 

(a) provide a new instrument to investors that offers hedging against inflation risk,

(b) enhance credibility of anti-inflationary policies,

(c) provide an estimate of inflation expectations and

(d) create an additional avenue for fund deployment and thereby facilitating widening of Government securities

     market.

 

Out of several variants of Inflation Indexed Bonds, the Capital Indexed Bonds (CIB) is the most popular and widely issued debt instrument internationally. In India also one variant of CIB (viz., 6 per cent Capital Indexed Bond 2002) was issued for the first time on December 29, 1997. Subsequent to that issuance, there was no further issuance of CIB mainly due to lack of an enthusiastic response of market participants for the instrument, both in primary and secondary markets.

 

Some of the reasons cited for the lackluster response are:

 

• it only offered inflation hedging for the principal, while the coupons of the bond were left unprotected    against inflation and
• complexities involved in pricing of the instrument. Taking into account past experience as well as the internationally popular structure of Capital Indexed Bonds a modified structure of Capital Indexed Bonds has been designed.

 

 

Proposed Structure of new Capital Indexed Bonds

 

In line with the international standards, the proposed CIB would offer inflation linked returns on both the coupons and principal repayments at maturity.

 

The Basic feature of bonds would be that the coupon rate for the bonds would be specified in real terms.

 

Such coupon rate would be applied to the inflation-adjusted principal to calculate the periodic semi-annual coupon payments. The principal repayment at maturity would be the inflation-adjusted principal amount or its original par value, whichever is greater, thus with an in-built insurance that at the time of redemption the principal value would not fall below par. The inflation protection for the coupons and the principal repayment on the bond would be provided with respect to the Wholesale Price Index (WPI) for All Commodities (1993-94=100), the leading measure of inflation in India.

 

Repayment:

Based on the Wholesale Price Index for All Commodities, the principal value of CIB would be adjusted.

 

The inflation-adjusted principal value of the bonds can be obtained for any date by multiplying the par value by the index ratio applicable to that date. The inflation adjustment to the principal would not be payable until maturity.

 

At maturity the CIB would be redeemed at its inflation adjusted principal amount or its original par value, whichever is greater, with an inbuilt insurance that the redemption value would not be below par.

 

Taxation

The value of the investment in the CIB and the coupon payable thereon would be governed by the provisions of tax laws as applicable from time to time.

 

 

For further details on the same, you can reach us at:

contactus@cogentadvisory.com
Call Centre  :  +91 - 87 4402 2020

Direct Contact  : Rajat Dhar (+91 - 9654.270.100)
 
 

 

 

 

 

 

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