Sapphire Foods-Devyani International merger: When and how shareholders will pay capital gains tax

Capital gains tax rules for shareholders after the Sapphire Foods and Devyani International merger

• Devyani International will issue 177 shares for every 100 shares in Sapphire Foods.
• No capital gains tax at merger; tax applies only when selling Devyani shares
• Original Sapphire share cost allocated to Devyani shares for future tax purposes

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The proposed merger of Sapphire Foods India with Devyani International has implications not just for India’s quick-service restaurant (QSR) business, but also for thousands of retail investors holding shares in either company. While the transaction itself is structured as a tax-neutral merger, shareholders need to clearly understand how capital gains will be computed when they eventually sell their post-merger shares.

Sapphire Foods announced on Thursday that it will merge with Devyani International, consolidating the Indian franchise operations of Yum! Brands-owned chains such as KFC and Pizza Hut under one listed entity. The merger comes at a challenging time for fast-food operators, who are facing slower same-store sales growth and margin pressure as consumers rein in discretionary spending amid rising living costs.

What Sapphire Foods merger with Devyani International entails for shareholders

Under the proposed scheme, Devyani International will issue 177 shares for every 100 shares held in Sapphire Foods. Once the merger is effective, Sapphire Foods shareholders will cease to hold SFIL shares and will instead receive Devyani International shares in the specified swap ratio.

The integration of the two businesses, along with the realisation of expected synergies, is projected to take 15–18 months from the effective date of the merger. Ahead of this consolidation, Arctic International, a group company, will acquire around 18.5 percent of Sapphire Foods’ paid-up equity capital from the existing promoters, with the option to later assign this stake to a financial investor.

For investors, however, the more immediate concern is taxation specifically, whether the share swap triggers capital gains and how the cost of acquisition will be calculated for future sales.

No capital gains tax at the time of merger

The merger has been structured to qualify as a tax-neutral transaction under the Income Tax Act. This means shareholders will not pay any capital gains tax at the time their Sapphire Foods shares are exchanged for Devyani International shares.

As Balwant Jain, a Mumbai-based tax expert, explains, "No capital gain implications at the time of merger of these two companies. Tax arises only when an investor later sells the Devyani International shares received under the merger. For this purpose, the original purchase cost of Sapphire Foods shares is apportioned across the Devyani shares received in the 177:100 ratio, and capital gains are calculated using this adjusted per-share cost."

This distinction is crucial. Tax liability does not arise when the merger happens, but only when shareholders choose to sell their Devyani International shares in the future.

How the cost of acquisition will be computed

For capital gains calculation, the key question is: what will be the cost of the Devyani shares received under the swap?

The answer lies in proportionate allocation. The original cost of acquiring Sapphire Foods shares will be spread across the Devyani shares received in the 177:100 ratio.

Assume an investor bought 100 shares of Sapphire Foods at Rs 300 per share.

Total investment cost = Rs 30,000

Under the merger, the investor receives 177 shares of Devyani International.

Cost per Devyani share = Rs 30,000 ÷ 177 = Rs 169.49 per share

When the investor eventually sells these Devyani shares, capital gains will be calculated as the difference between the sale price and this adjusted cost per share.

What about the holding period?

Another important aspect is the holding period. For tax purposes, the holding period of the original Sapphire Foods shares will be carried forward to the Devyani International shares. This means that if the Sapphire shares were held for more than 12 months, the gains on sale of Devyani shares will qualify as long-term capital gains (LTCG).

Accordingly, LTCG will be taxed at 12.5 percent on gains exceeding Rs 1.25 lakh in a financial year (without indexation). Short-term capital gains will be taxed at 20 percent.

What shareholders should keep in mind

While the merger itself does not trigger a tax bill, investors should retain records of their original purchase price and acquisition date of Sapphire Foods shares. These details will be critical when computing capital gains in the future.

For long-term investors, the consolidation may offer business synergies and scale benefits. From a tax perspective, clarity on cost allocation and holding period continuity ensures there are no unpleasant surprises when exiting the investment.