Tax implications likely to influence Hyundai's decision to list Indian arm

Hyundai Motor is exploring an initial public offering (IPO) of its Indian unit to raise around $3 bn (at a valuation of up to $30 bn), according to sources

South Korean auto giant Hyundai Motor Company is considering tax implications on listing its Indian unit before taking a final call, according to sources privy to the development.

Hyundai Motor is mulling an initial public offering for its Indian arm to raise around $3 billion (at a valuation of up to $30 billion), and talks are in the early stages between the company and bankers, banking sources revealed. Hyundai Motor India Ltd (HMIL), however, declined to comment on the development.

The South Korean company is assessing its local expansion plans before taking a final call, said one of the bankers. While Hyundai is enthused by the prospects of the goodwill the IPO would bring in, it is not keen on just doing a secondary share sale, fearing high capital gains tax outgo, the banker added.

“If the parent company sells its shares in the Indian subsidiary, it may have to pay capital gains tax in India, as well as in South Korea, depending on the tax treaty between the two countries,” said Jidesh Kumar, Managing Partner, King Stubb & Kasiva, Advocates and Attorneys.

The tax rate may vary depending on the holding period and the nature of the shares. Some exemptions or deductions may be available for foreign investors under the Income Tax Act or the Double Taxation Avoidance Agreement (DTAA).

“Capital gains tax outgo could be a factor that influences the decision of the parent company to go for an IPO. However, it may not be a major impediment, as the benefits of raising capital, improving public image, creating liquidity and diversifying the equity base may outweigh the tax costs. Moreover, the parent company may reduce its tax liability by availing the benefits of the DTAA,” Kumar said.

It can help the company raise capital for its expansion plans, research and development, debt repayment, acquisitions, or other business purposes. It can enhance the public awareness and credibility of the company, as it will be subject to more transparency and disclosure requirements, he said.

Sources said Hyundai has largely met officials from US-based banks including Bank of America, Morgan Stanley, JP Morgan and Citibank during the initial rounds.

Once the automaker firms up its listing plans, it will take on board more banks. “It will also rope in domestic and retail-focused banks as it would want to market the IPO through the length and breadth of the country for creating brand awareness and loyalty,” said an investment banker.

“Hyundai being such a large conglomerate has never listed outside its home market. As a result, it will weigh the proposal very carefully. Listing locally comes with a lot of advantages and helps create a lot of interest in the company. However, it is also a lifelong commitment towards meeting all regulatory compliance that comes with listing. Besides, there will be tax implications if the parent has to repatriate funds back to the home country,” said the banker.

Meanwhile, sector analysts feel Hyundai Motor India may use the funds for its Indian capex (Rs 32,000 crore planned over the next 10 years). As such the Korean automaker has Rs 17,741 crore in cash and a profit after tax of Rs 4,654 crore on a revenue of around Rs 59,761 crore in FY23, showed data from Capitaline. Their profits have doubled in the last five years from Rs 2,124 crore in FY18 to Rs 4,654 crore in FY23, dipping during the pandemic year of FY21 (Rs 1,847 crore).

HMIL plans to invest Rs 6,000 crore in the newly-acquired plant from General Motors in Talegaon. It will also invest Rs 26,000 crore in Tamil Nadu to expand production, develop a components ecosystem, electric vehicle manufacturing, charging infrastructure and skill development over the next 10 years.

Hyundai is one of the few multinationals that have managed to crack the Indian car market. It enjoys the second position in the domestic car market with a 15 per cent share. India is a major market in Hyundai’s global plans. According to the Korean major’s annual guidance update for 2024, India would rank fourth among the global markets where Hyundai has a presence including its home market. Hyundai plans to wholesale 613,000 units in India in 2024 close on the heels of Europe (632,000 units). North America is its largest market in terms of volumes followed by Korea.

Puneet Gupta, director-Mobility, S&P Global said that Hyundai, Kia have always been proactive in terms of their offering, asserting they have always been first movers in terms of offering features and have followed an aggressive strategy for the Indian market,” Gupta said.

Hyundai and Kia together have been able to cash in on economies of scale too when it comes to components sourcing, he said.

“However, the average selling price (ASP) in India is still lower than the ASP in other countries like in Europe which is pulling down the average for Hyundai global,” Gupta added.