Stock Market

Block trades may surge till March 31: Here’s why

Promoters are rushing in forinter-se transfers and the market is likely to see a lot of block trades before March 31 due to a Budget provision.

In the Budget, there was a proposal by the Finance Ministry that long-term capital gain (LTCG) tax on the sale of equity will not be available to those who acquired shares on or before October 2014 and hadn’t paid the securities transaction tax (STT) of 0.125 percent.

This means that after April 1, if one is selling anything that is long term and have not paid STT previously, then the person won’t be able to avail benefits of LTCG.

A day before, Reliance Industries saw huge block deal worth Rs 50,000 crore and today Balkrishna Industries saw 25 percent equity inter-se transfer. 

Explaining the rationale behind the Finance Ministry’s decision, Dinesh Kanabar, CEO of Dhruva Advisors said: “There were artificial gains generated on the stock exchanges to the tune of about Rs 60,000 crore in the last one year and the government is attempting to plug it.”

Kanabar further said that the government does not intend to impact genuine transactions. Since there is no definition of ‘genuine transaction’, the government is likely to come out with series of exemptions.

Below is the transcript of Dinesh Kanabar’s interview to Latha Venkatesh on CNBC-TV18.

Q: One, there were some scamsters whom the government wanted to catch with this. Tell us if that is successful and more importantly, who may be the innocent victims? Say, people who have inherited shares after the cut-off date.

A: When I had an interaction with the revenue secretary and others within the industry and I asked them the rationale behind this entire amendment, what I was told, and which was quite shocking, was that there were artificial gains generated on the stock exchanges to the tune of about Rs 60,000 crore in the last one year and the government is attempting to plug it.

This is really penny stocks being acquired for Rs 2 and then maybe taken to Rs 2,000. There was this particular instance which was reported a week back where shares of a company appreciated by 16,000 percent in the last two years.

So, really are the worth it? Is it only being driven to get long-term capital gains and convert probably what is legitimate money into legitimate money and therefore, there cannot be a doubt on what the government is seeking to do out here and what it is trying to plug.

Unfortunately, to your question about innocent, the way the amendment is worded is very broad and therefore, hits everybody out there. And the amendment, as was earlier mentioned, simply states that any shares acquired post 2004, when the Securities Transaction Tax (STT) regime came into force, if the acquisition was not STT bid then the disposition even if STT bid will not be eligible to long-term capital gains tax exemption. Hence it hits everybody.

There are shares which are acquired on a demerger, there are shares which are acquired on a merger, there are inheritances, there are gifts, there are several transactions. Forgetting all of those. So take a very simple transaction today. If an entity was started by a promoter in 2005, let us say in 2011 he got a venture capitalist (VC) to invest in it and there is an IPO now. When the disposition happens, neither the promoter nor the VC is going to get long-term capital gains tax exemption.

And in the civil interactions that one has had with the Central Board of Direct Taxes (CBDT) officials and with others, we have pointed out these difficulties and what we have been told, one is that the government does not intend to really impact genuine transactions, but there is no definition of a genuine transaction and therefore, the government would like to come out with a series of exemptions.

 And that is what worries me. The type of exemptions we have discussed really could be 10 times longer than the section itself. And the suggestion which has gone to the government is that rather than come out with a list of exemptions, could they really not provide that shares which are thinly traded on the stock exchange, the Z-category stock or whatever else, are the only ones impacted by the amendment. If that was done, then no such issues like what you are witnessing today in terms of restructuring by promoters would arise at all.

(Disclosure: Reliance Industries owns Network18 which publishes Chillicious)