INDIA INC GETS GO-AHEAD FOR EXCHANGEABLE BONDS, FINANCE BILL 2008 SAYS CONVERSION OF FCEBS INTO SHARES OR DEBENTURES WILL NOT ATTRACT CAPITAL GAINS TAX

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Companies planning to raise funds through foreign currency exchangeable bonds (FCEB) can now go ahead as the Finance Bill 2008 has cleared the air on tax issues. The Bill has proposed that conversion of FCEB into shares or debentures of any company shall not be treated as a transfer under the Income Tax Act. This implies that the transfer of shares would not attract capital gains tax.

Capital gains tax would be leviable only on further sale of these shares by the bondholder as per the rules in his country of residence. The cost of acquisition of shares under the FCEB would be the price at which a subscriber buys the bonds. The provisions would become applicable from April 1, 2008, after the passage of the Bill.

The interest payments to bondholders will be subject to a deduction of withholding tax (TDS) at 10%.

“With the tax issues regarding the foreign currency exchangeable bonds being clarified, we expect companies to use the instrument for their fund-raising programmes,” said Ernst & Young partner Amitabh Singh. A large number of companies have expressed desire to raise funds through FCEBs.

The finance ministry had recently notified the guidelines for the issue of the FCEBs. Finance minister P Chidambaram had announced the instrument in the 2007 budget.

FCEB is a quasi-debt instrument that allows large corporate houses with multiple subsidiaries to raise money without actually selling shares. The structure of FCEB is akin to the Foreign Currency Convertible Bonds, but differs from it in as much as the later can only be converted into shares of the issuing company, while the FCEB can be converted or exchanged into shares of a group company.

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