Arnav Pandya
Investors are often faced with the question of tendering their shares to a company under a scheme of buyback or open offer or selling them in the market. The decision is important because the investor wants a higher return at the end of the day.
When it comes to the tendering of such shares then it is the question of getting a higher price so that there is a better return that comes to the investor after the tax implication is considered. Which of the routes is better is the main issue to be dealt with and here is a way to look at the entire matter and how this would actually be handled.
Actual value
One of the first factors that have to be considered in the entire process is the actual value or price that the individual will actually get when they give their shares in a particular area.
There is no certainty of the price in either of the areas that are involved till the time that an actual decision is taken to give the shares and hence this is an important factor to consider.
For example when it comes to the open market then the price is every changing so if the investor sees a particular price, which they find attractive then they have to sell their shares at this price and book their position. If this is not done then the opportunity might be lost as the price could dip.
The price in the open offer might be decided beforehand in which cases there is no much to worry about as the figure is actually known. However in some cases this would be determined after all the bids come in and in such a situation the individual would have to ensure that they make some estimates as the price would actually be there after they have actually made their decision to submit the shares.
Tax angle
The other vital angle in the entire decision making process is the tax that would have to be paid by the individual when they are completing the transaction. The sale of the shares in the open market on the stock exchange could make the investor eligible for a lower or concessional rate of tax on the gains that could arise in the process.
If the shares are held for more than a year then the individual will not have to pay any tax as the long term capital gains rate would be zero. On the other hand the short term capital gains rate if they are faced with this would be 15 percent.
On the other side when it comes to the question of tendering the shares to the company then since this is not done on the stock exchange it would be taxable.
The short term rate here would have the amount added to the income of the individual and hence this could be taxed even as high as 30 percent.
On the other hand the long term rate would be 20 percent with the benefit of indexation or 10 percent without the benefit of indexation. This could result in the tax bill being quite higher on the tendering process.
Overall decision
The overall decision of the individual would have to take both these factors into consideration. It could be that the price in the open offer is slightly higher but when considered on an after tax basis then this could well come down below the price that is availed of in the open market. This is something that cannot be avoided and would have to be considered in the overall decision making process.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
