Foreign Portfolio Investors (FPIs) who have held Bajaj Finance shares since before 2018 may be staring at a significant tax outgo, following the recently announced stock split and bonus share issue.
The NBFC last week declared a 1:2 stock split and a 4:1 bonus share issue - its first bonus issuance in nine years – that may lead to an unpleasant surprise for legacy foreign investors.
The tax impact of FPIs arises from the capital gains tax rules and grandfathering provision, introduced in 2018, that brought back long-term capital gains (LTCG) tax on listed equities. The law allowed shareholders of listed equities prior to January 31, 2018, to compute LTCG using the fair market value (FMV) of the stock as on that date instead of the original purchase price. This step-up in cost base significantly reduced the capital gains tax burden for such investors. However, the relief does not extend to bonus shares, which are treated as fresh allotments and assigned a zero acquisition cost.
Tax experts point out that this gap could materially impact the effective tax outgo of FPIs who receive four bonus shares for every one share held. “Unlike stock splits, bonus shares do not get the FMV step-up benefit under the grandfathering clause. So, for FPIs, the cost of acquisition for these bonus shares is treated as zero. The entire sale proceeds, if and when sold, are liable to tax,” said one tax expert on condition of anonymity.
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In practical terms, even if an FPI had acquired Bajaj Finance shares before 2018, any capital gain arising from the sale of bonus shares would be fully taxable. Since these bonus shares are issued in 2025, they are treated as new assets and the holding period is reset. If these shares are sold within a year of allotment, a higher short-term capital gains tax of 20 percent may apply, despite the underlying investment being held for several years.
"Tax treatment of bonus shares has been a long-standing concern for investors. Resetting the period of holding to the date of allotment of bonus shares is particularly burdensome, as it can increase the tax rate from 12.5% to 20% if these shares are sold within one year of allotment. It is quite unfair that an investor could be holding shares for over a year, yet, upon receiving bonus shares, those are suddenly treated as short-term holdings." said Suresh Swamy, Partner at Price Waterhouse & Co LLP.
The tax hit is potentially more severe for FPIs operating out of Mauritius and Singapore, jurisdictions that until recently enjoyed favourable terms under India’s Double Taxation Avoidance Agreements (DTAAs). Under those agreements, capital gains on shares acquired before April 1, 2017, were exempt from taxation in India. However, since bonus shares are treated as new issuances and not extensions of the original stake, they do not qualify for grandfathering under the DTAA either. A senior tax advisor familiar with the matter said, “even if an investor acquired Bajaj Finance shares in 2016, the bonus shares issued now will attract full capital gains tax in India, with no treaty protection.”
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“This is a classic instance of treaty benefits not aligning with corporate actions, “he added.
Adding to the complexity, tax advisors note that many FPIs may not have factored in these implications in their portfolio models. The timing and nature of the issuance, while market-positive in terms of liquidity and investor participation, could disrupt investment strategy for funds managing older positions. Bajaj Finance remains a heavily held stock among foreign institutions.
As per exchange records, FPIs own a 21.46 percent stake in Bajaj Finance as of March 2025. Back in December 2017, this shareholding stood at 28.9 percent, which suggests that a meaningful portion of outstanding shares are legacy holdings, potentially impacted by the new issuance structure.
An email sent to Bajaj Finance seeking comment on the tax implications remained unanswered at the time of publishing.
The episode underscores the need for FPIs to undertake a reassessment of their tax position, particularly for long-held investments that could now fall afoul of treaty provisions or domestic tax rules. For a market increasingly driven by foreign capital, the incident also highlights the broader need for regulatory clarity on how corporate actions such as bonus issuances are treated under domestic and treaty-based tax frameworks. Without such alignment, even well-intended shareholder rewards could turn into costly surprises for long-term investors.
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