INDIA BUSINESS WORLD - JUNE 1st - JUNE 30th - 2008
TAX SWORD HANGS OVER RANBAXY-DAIICHI DEAL
In what could play a crucial role in the Ranbaxy-Daiichi deal, it has been learnt that there is a clause in the agreement which says the 34.8% holding of promoters will be sold through a stock exchange transaction. But there’s a catch: only if the Ranbaxy scrip touches a minimum of Rs 729 will the promoters be able to sell their stake at Rs 737 per share to Daiichi Sankyo. This is because Indian laws allow bulk deals only at a price that is 1% more or less than the market price or previous day’s closing price.
A stock exchange transaction will result in the promoters saving over Rs 1,000 crore, which they would have to fork out if it were an off-market deal. Unlike an off-market deal, which attracts 10% long-term capital gains tax, bourse transactions do not attract this levy. The promoters will, therefore, hope the Ranbaxy share reaches the figure of Rs 729 before the deal is executed.
That, however, will depend on the movement of the stock. It will decide whether the Singh family will transfer its 34.8% stake in Ranbaxy to Daiichi through direct off-market sale or through negotiated deals on stock exchanges.
Considering that the stock market has been going through a bear phase and the Ranbaxy stock reached its three-year high, legal sources are uncertain whether the Singh family will be able to conclude the proposed transaction through negotiated deals and thereby be eligible for securities transaction tax. If not, the promoters will have to sell their shares through an off-market deal, attracting a huge tax liability.
“As it appears now, the possibility of the Singh family ending up with a huge capital gains tax liability is high. The only advantage the family enjoys is that it has nine months to consummate the deal,” said a legal source.
When contacted, a company spokesperson said, “We cannot comment further on the deal.” It is, however, learnt the company will opt for an onscreen transaction. The promoters will wait for the share to touch Rs 729 and then execute the sale. “The moment the price touches the minimum level of Rs 729, they will do the transaction onscreen,” said a source.
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