Tata Motors DVR shares have been suspended from trading on stock exchanges. Sunday, September 1, is the record date for the purpose of determining the names of the holders of ‘A’ ordinary shares, who would be entitled to receive the new ordinary shares as consideration.
Tata Motors has set the conversion ratio at 10:7 -- seven fully paid up new ordinary shares for every 10 ‘A’ ordinary shares -- the conversion will lead to a reduction in share capital by 4 per cent.
To operationalise the capital reduction scheme, Tata Motors Ltd has established an irrevocable determinate private trust named TML Securities Trust with Axis Trustee Services, which is acting as an Independent Trustee. Tata Motors would be issuing new ordinary shares to this trust on behalf and for the benefit of each of the 'A' ordinary shareholders.
In a capital reduction scheme, consideration distributed in the form of new shares is treated as distribution of accumulated profits to the shareholders. This is as per Section 2(22)(d) of the Indian Income Tax Act, 1961. Accordingly, accumulated profits as on the record date will be treated as deemed dividend in the hands of shareholders and will be taxable at the applicable tax rates (including slab rates for individuals). This will also be subject to TDS.
DRChoksey FinServ Private Limited noted that Tata Motors has standalone reserves of Rs 10,033 crore. When equated with DVR shares of 51 crore, it is equal to Rs 200 per share. The Rs 200 of reserves per each DVR share will, thus, be treated as deemed dividend since it is getting converted to ordinary shares, it said.
There are 3 legs of tax applied to shareholders, who are receiving ordinary shares against DVR shares. First, TDS on deemed dividend will be paid by TML Securities Trust on behalf of shareholders. The trust will pay this TDS by selling ordinary shares so allotted to shareholders in T+15 days post September 1. TDS will be claimed back by shareholders in their ITR based on certificate issued by TML Securities Trust.
TML Securities Trust will also pay STCG for selling shares to recover TDS. Net quantity after paying TDS will be allotted to shareholders, accordingly.
Lastly, LTCG will be paid by shareholders who receive ordinary shares against DVR, Deven Choksey DRChoksey FinServ Private Limited said in a note.
To be sure, the deemed dividend of Rs 200 per share will attract 10 per cent TDS for resident & corporate shareholders, while mutual funds, AIFs & insurance companies will be exempt from this TDS, DRChoksey FinServ Private Limited said.
"Such TDS will be paid by TML, by forming TML Securities Trust. The amount of TDS will have to be recovered by the said trust by selling between 0.60 to 0.80 crore ordinary shares, which are newly allotted of DVR into ordinary shares," it said.
"Accordingly, the number of shares to be allotted to other than mutual funds, AIF and insurance shareholders will be reduced to the extent of TDS amount. Such TDS can be claimed by them in their income tax return. The trust will issue certificate to that effect," it added.
On the other hand, the capital gains tax will be attracted on the conversion of the DVR shares: it is assumed that cost price of those shares will be the close price of ordinary shares of August 30.
"In our view even if TML securities is required to sell 0.6 to 0.88 crore of ordinary shares (received on conversion of DVR as explained above) it will have limited impact on the stock price of Tata Motors. We expect this transaction by TML securities trust to take place within T+15 days as per timeline given by the company," the research note said.