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Why are RIL’s promoters restructuring their holdings?

LiveMint logoLiveMint 03-03-2017 Kalpana Pathak

Mumbai: A Thursday evening statement by Reliance Industries Ltd (RIL) that its promoter entities are restructuring their shareholding has the market searching for reasons. The restructuring will not change the promoter stake (currently 46.48%) in India’s largest company by revenue; around 1.2 billion shares held by 15 entities are being transferred to eight others.

Experts said promoters typically undertake such transactions when they want to save on tax or redistribute wealth among family members for succession planning. Most experts wanted to remain anonymous because they either count RIL as a client or are not aware why this so-called inter se share transfer is happening.

RIL declined to comment.

The head of a tax advisory firm said that the general anti-avoidance rules (GAAR), which will kick in from 1 April, might have prompted the restructuring. GAAR seeks to give the tax department powers to scrutinize transactions structured in such a way as to deliberately avoid paying tax.

“With GAAR kicking in from next month, transfer of shares will be taxable and that definitely is a reason why RIL may be doing this before 31 March,” said the person.

“Any share transfers post-GAAR, if it results in a favourable tax situation for any company, will be taxed under GAAR. For instance, if a company transfers its shares to an LLP (limited liability partnership) where MAT (minimum alternate tax) is not applicable, then such transaction can be taxed under GAAR. This is more to do with having a structure that is tax endurable in the future rather than tax evasion or tax planning, ” this person added.

A corporate tax advisor said the promoter could be also doing this to minimize potential long-term capital gains tax impact if such a levy materializes. Currently, if a stock is held for more than a year, it is exempt from capital gains tax. In a 24 December speech, Prime Minister Narendra Modi had said that “those who profit from financial markets must make a fair contribution to nation-building through taxes”, sparking speculation that such a levy was in the offing.

“The promoter group could be doing this for a cost step-up. If long-term capital gains tax is introduced, it will help minimize the impact. And even if it is not introduced, there will still be potential gains in MAT (minimum alternate tax) that will accrue,” said the tax adviser.

A cost step-up means readjusting the value of an appreciated asset for tax purposes upon inheritance. When an asset is passed on to a beneficiary, its value is typically more than what it was when the original owner acquired it. The asset receives a step-up so that the beneficiary’s capital gains tax is minimized.

The entities which are involved in the transactions are limited liability companies.

“Transparency or disclosures with regard of LLPs is limited as one does not have to make all financial declarations with the registrar of companies,” said Shriram Subramanian, founder and managing director of InGovern Research Services Pvt. Ltd, a proxy advisory firm.

On Friday, RIL shares traded at a fresh nine-year high on the BSE after the company proposed this move. In intraday trade, the scrip rose as much as 4.42% to touch a high of Rs1,287.80, a level last seen on 23 May 2008. It closed at Rs1,258.45, up 2%, compared with a flat broader market. The company announced its guidance for its Jio telecom venture, which has set an ambitious target of 50% revenue market share by 2021, boosting the stock’s gains.

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