The finance ministry will examine the proposed 100 per cent acquisition of the Delhi Stock Exchange (DSE) by the Bombay Stock Exchange (BSE) and consider how to tax DSE members who are hoping to gain concessions for availing BSE membership rights based on the valuation of the Delhi bourse.
A senior finance ministry official said, "It will have to be examined by the Central Board of Direct Taxes (CBDT) if the concessions to the DSE members give rise to capital gains, and how to tax them."
The articles of association of the DSE do not permit the corporate entity to declare dividends or distribute profits. A exchange, though a corporate body, is exempt from paying tax on income like charitable organisations under Section 11 of the Income Tax Act.
As per the memorandum of understanding signed between the two bourses, which has since been approved by the governing board of the Mumbai bourse, the DSE members would be offered trading membership at a concessional rate upon surrender of their existing membership.
"The value of the concession would be arrived at after ascertaining the net worth of the DSE and apportioning it equally among the DSE members. There would, in addition, be a discount to the normal membership price that BSE would be charging for fresh trading membership," the pact between the two exchanges states.
Ministry officials said the revenue department would look at how such a benefit to the DSE members derived out of the valuation of a charitable organisation could be taxed. In the normal course, the consolidated income after the merger will be taxable, said an official.
DSE' s reserves as on March 31, 2000 stood at over Rs 67 crore, while its excess income over expenditure stood at Rs 5.68 crore on a paid-up capital of Rs 7.58 lakh.
As per the agreement between the two exchanges, DSE members would be offered trading membership in BSE only after the demutualisation of the latter. The BSE's corporatisation and demutualisation scheme entails listing the equity shares of BSE Ltd, the corporatised exchange, in BSE as well as other stock exchanges and an initial public offering by BSE Ltd within three years.
Sources said the acquisition of DSE, which as of now avails of tax exemptions under Section 11 of I-T Act, by BSE Ltd, which proposes to be a profit-making and dividend declaring corporate entity post demutualisation would be a test case. This would have larger ramifications on the possible acquisitions of charitable organisations by profit-making corporate outfits, they said.
