CA. K. C. Agarwal
The public issue of Indian Depository Receipt (IDR) of Standard Chartered PLC. has already hit the market. The issue closed on 28th of May, 2010. These IDRs shall be listed in the Bombay and National Stock Exchange some time in the second week of June, 2010.
News papers are carrying the reports that IDR is a derivative product and 1 share is under lying against 10 IDRs . Thus, no share shall be allotted directly to the IDR bidders. In fact, shares of Standard Chartered PLC. shall be placed in the custody of Standard Chartered Depository , at Mumbai which in turn shall issue the depository receipts to successful IDR bidders to be credited in their demat accounts.
Thus IDRs can not, by any stretch of imagination, be deemed to be an equity share or a debt instrument. It is therefore, desirable to examine its taxability under Income Tax Act, 1961.
Question is that whether IDR is a derivative product, shares or security. Derivative means future and options. If it can be listed as future and options then IDR may be derivative product in addition to other type of asset. It is not shares as shares are not allotted by the bank to the applicants. As you say ten IDR representing one share but if shares are actually not allotted, the name of IDR holder not entered in the register of members then it cannot be said that IDR is share. Now question is that whether it is security?
As per Section 2(h) of the Securities Contract (Regulation) Act 1956, Securities include (i) shares, scrip’s, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or any incorporated company or body corporate, (ii) government securities, (iia) such other instruments as may be declared by the Central Govt. to be securities and (iii) right or interest in securities.
Listed securities means securities listed in any recognized stock exchange.
Whether IDR is a security? The same is to be decided considering the definition of securities as above.
Merely because of IDR to be listed in stock exchange it may not be considered as security for deciding taxability of IDR.
Q. Whether IDR is a derivative Product ?
A. YES. Indian Depository Receipts (IDR) are similar to Global Depository Receipts (GDRs) and American depository receipts (ADRs). Just like GDRs and ADRs, Indian Depository Receipts (IDR) are derivative instruments that have shares as the underlying assets . The IDR derives its price from the value of its under lying shares. If price of shares of Standard Chartered PLC goes up in the international market , the price of IDR shall also go up. Thus the price of its share and IDR shall move in tandem. Standard Chartered Bank’s shares are traded on the London Stock Exchange and the Hong Kong Stock Exchange. The Standard Chartered PLC’s Indian Depository Receipts (IDRs) shall discover its price on the basis of quoted price of bank’s shares at London stock exchange , which currently hovers around £17 a share (Rs 1,140). Since each IDR will represent 1/10th of a share, the equivalent price per IDR. would be around Rs 114.00 The IDR’s will be listed both on Bombay Stock Exchange and National Stock Exchange, and investors will have the option to convert them into shares after one year.
Q. Whether IDRs are Securities ?
The Red Herring Prospectus (HRP) has clarified as under that IDRs shall be a listed security.
“Since IDR will be a listed security, the capital gains on sale thereof will be considered long-term if the IDR is held for more than 12 months from the date of purchase.” [ Page 413 of HRP ]
Q. Whether Bank shall declare dividend on shares in true sense of the term ?
From following it appears that dividend declared by Standard Chartered shall be a normal and usual dividend.
“An IDR Holder will be entitled to dividends in respect of the Deposited Shares represented by their IDRs , if the Company declares a cash dividend to be payable to holders of Shares”.[Page No.48 of RHP]
Q. S hall dividend distribution tax be payable on dividend on IDRs ?
From the following wordings of RHP it appears that dividend distribution tax shall not be payable on the dividend declared by it, though RHP does not specifically mention so.
“Under the Income-tax Act, dividends declared by an Indian company (or any other company which has made the prescribed arrangement for the declaration and payment of dividends in India ), shall be subject to a dividend distribution tax payable by the company. Such dividends shall then be exempt from tax in the hands of the shareholder under section 10(34) of the Income-tax Act.”
“This exemption from dividend income under section 10(34) is not applicable to dividends paid to IDR Holders and accordingly, the dividends received by the IDR Holders in India shall be taxable in the hands of the IDR Holders.”[Page 413 of RHP]
Q. Shall Securities Transaction Tax be payable on these IDRs ?
It is clear from the following that Securities Transaction Tax will not be payable on the trading of IDRs.
“Based on the current provisions of Chapter VII of the Finance (No.2) Act, 2004, pertaining to STT, IDRs should not be subject to STT”. [Page 414 of RHP]
Q. Whether dividend on IDRs ,shall be taxable in the hands of IDR holders?
It is clear from the following that dividend shall be taxable in the hands of recipients.
“This exemption from dividend income under section 10 (34) is not applicable to dividends paid to IDR Holders and accordingly, the dividends received by the IDR Holders in India shall be taxable in the hands of the IDR Holders.” [Page 413 of RHP]
Q. What shall be the required minimum period of holding of IDRs for making it a long term capital asset?
It is clear from the following that a holding period above 12 months is necessary to make it a long term asset.
“Under the Income-tax Act, there are two types of capital gains: ‘long-term capital gains’ and ‘short term capital gains’. A gain arising on the sale of shares in a company, listed securities or units will be considered as long-term capital gains if they are held for a period exceeding 12 months and a gain arising on the sale of these assets held for 12 months or less will be considered as a short-term capital gain. Since IDR will be a listed security, the capital gains on sale thereof will be considered long-term if the IDR is held for more than 12 months from the date of purchase”. [Page 414 of RHP]
Q. At what rates shall the short term and long term capital gains, arising from the transfer of IDRs, be taxed ?
“Section 10(38) of the Income-tax Act exempts income arising from transfer of long-term capital asset being equity share or a unit of an equity-oriented fund on which securities transaction tax (‘STT’) has been paid. Further, under section 111A of the Income-tax Act, short-term capital gains arising on transfer of equity shares in a company or a unit of an equity-oriented fund are taxed at the concessional rate of 15%, plus applicable surcharge and education cess”.
Based on the current provisions of Chapter VII of the Finance (No.2) Act, 2004, pertaining to STT, IDRs should not be subject to STT. Accordingly, the corresponding exemption from long-term capital gains tax under section 10(38) of the Income-tax Act and the concessional tax rate for short-term capital gains under section 111A of the Income-tax Act will not be available to IDR Holders on transfer of IDRs. [Page 414 of RHP].
In view of above the IDRs , as stated in my earlier mail , shall be taxable as under ;
- The short term capital gain arising from transfer of such IDRs shall be normally taxed as per tax slab of IDR holder. The tax rate of 15%, as specified in section 111A, shall not apply to this.
- The long term capital gain arising from transfer of such IDRs shall be taxed under section 112 of Income Tax Act. The amount of tax shall be the lower of the following two ;
(i) An amount calculated @ 10% of capital gain with out availing benefit of indexation, or,
(ii) An amount calculated @ 20% of capital gain after availing benefit of indexation.
Long term capital gain from IDR shall not be exempt under section 10 (38) of Income Tax Act, 1961.
