Taxing times for IPOs: LTCG tax prompts issuers to expedite market launch

But ongoing correction could play spoilsport

The reintroduction of the long-term capital gains (LTCG) tax has placed companies coming up with initial public offerings (IPOs) in a quandary. According to sources, about half-a-dozen companies are planning to launch their IPOs before the end of this fiscal year to avoid the tax. However, the downturn in the stock market provides little comfort to bankers and issuers over listing.

Besides the 10 per cent tax outgo, the eligibility for the grandfathering benefit for companies that list after April 1 is bothering promoters. Tax experts say it is unclear how the new regime will apply to companies that were unlisted on January 31, 2018, the cut-off date for grandfathering.

Over two dozen companies have filed IPO documents with Securities and Exchange Board of India (Sebi) to raise a cumulative Rs 337 billion. More than half have already obtained approval from the Sebi. Most IPOs involve secondary share sales by promoters and private equity (PE) investors. While there will be no additional cost involved for the fresh issue component, a LTCG tax of 10 per cent will be applicable on all share sales by existing investors. The development is significant because the lion’s share of IPOs in the last three years are on account of exits by investors.

“The companies where promoters or PE investors are looking to exit through IPOs may expedite the listing process after the LTCG tax reintroduction. If these companies list post April 1, the grandfathering provisions are not clear and they may be subjected to 10 per cent capital gains tax without being eligible for the grandfathering clause under the rules as the company was not listed as on January 31,” said Amit Singhania, partner, Shardul Amarchand Mangaldas.

Under grandfathering, the mark-to-market gains realised till January 31, 2018, are protected from tax. Any appreciation in shares post January 31 will be taxed without any indexation. This benefit, however, applies to only listed companies, say experts. 

“All the changes in the LTCG regime apply only to listed securities. However, the rules were unchanged for unlisted entities. Hence, if a company lists post April 1, it will not be eligible for grandfathering. In such cases, the original cost of acquisition will be taken into account,” said Riaz Thingna, director, Grant Thornton Advisory.

The ongoing correction in the secondary markets also seems to be a cause for concern for these IPO-bound companies as launching a public offering in volatile markets could be a tricky situation. The Indian benchmarks have declined 4.4 per cent from their peaks. 

Experts fear the weakness might continue as rising global bond yields force investors to move to safer havens away from risky equities. Strong underlying equity markets are critical for IPO issuances.

The year 2017 proved to be a record year for equity mobilisation thanks to the strong undercurrent in the secondary market. 

However, with the markets heading south, investor appetite for new paper could wane, say bankers.“As of now we are not seeing any significant fall in the investor appetite for IPOs. However, primary and secondary markets are interlinked and hence any significant fall in the equity market has the potential to undermine IPOs and their valuations,” said Gaurang Mehta, executive director, investment banking, Axis Capital.

Investment bankers say the LTCG announcement will not impact IPOs but also other capital market transactions such as follow-on issuances (FPOs) and block deals. According to industry estimates, market issuances worth Rs 500 billion have been lined up in the next few months. This includes divestment issuances worth Rs 200 billion, others being IPOs and block deals.