Tax Implications For Equity Shareholders In The HDFC–HDFC Bank Merger
In some cases, there'll be tax incidence post the merger of HDFC and HDFC Bank. Here's what you need to know.
The merger of Housing Development Finance Corp. and HDFC Bank Ltd. has different implications for various stakeholders.
Shareholders of the erstwhile HDFC need to watch out for the share swap ratio. The immediate tax implication of the merger will be the cash that is received for the fractional shares, while the bigger impact depends on the manner in which the investor deals with the shares of HDFC Bank after the allotment.
Overall Situation
The swap ratio for HDFC shareholders to receive shares in HDFC Bank has been fixed at 25:42. This means that for every 25 shares held by investors in HDFC, they will get 42 shares in HDFC Bank. If we break this down, then it translates to a situation where every one share held in HDFC will lead to an allotment of 1.68 shares in HDFC Bank. The record date for the merger was July 13, 2023. This means that all the shareholders who held shares in HDFC on that particular date would be eligible for the conversion of their holdings into HDFC Bank.
Exact Conversion On Swap
The situation is the easiest for any shareholder who holds shares in exact multiples of 25 in HDFC because they will get HDFC Bank shares for the full number of shares.
For example, if an investor had 100 shares, they would get 168 shares. If some investor had 250 shares, they would get 420 shares. This situation has no tax implication because the allotment of shares on a merger is not a taxable event, and hence for those shareholders who get an exact allotment against their holdings, there is no tax impact till the time they sell these shares.
Fractional Shares
There are likely to be lots of small investors who do not hold shares in exact multiples of 25 in HDFC. Even for larger shareholders whose holdings are not in exact multiples of 25 in HDFC, there will be an additional impact to face. For these shareholders, they need to take a look at the conversion ratio and see how many shares are to be allotted. In case the working comes to a fraction, then the shareholder will be allotted shares until the previous lower whole number.
For example, if a person has, say, 10 shares, they would be entitled to 16.8 shares in HDFC Bank. Since shares cannot be allotted in fractions, the investor will get 16 shares, and for the remaining 0.8 shares, they will receive cash.
The cost of the 16 shares in HDFC Bank will be the proportional cost to the shareholder. If, in this case, the 10 shares were purchased at Rs 2,150, then the total cost would be Rs 21,500 (10 x 2,150). The proportional cost for 16 shares would be Rs 20,476 (21,500 X 16/16.8), and the cost for the remaining 0.8 share would be Rs 1,024 (21,500 X 0.8/16.8).
Taxation On New Shares
The allotment of shares in HDFC Bank to the existing shareholders of HDFC does not trigger a tax event until the time that they actually sell the new shares. When the investor gets the new shares in HDFC Bank, nothing changes on the tax front for them. When they sell the shares and earn a profit, these will be classified under the head of capital gains, and based on the period of holding, they will either be taxed as short-term or long-term capital gains.
The period of holding for taxability as long-term capital gains is 12 months. Since this is a merger, the holding period for the shares allotted in HDFC Bank will be calculated from the date on which the shares were originally bought in HDFC and not from when they will be converted after the merger.
For example, if a person bought shares in HDFC on April 22, 2021, then the holding period has to be counted from that date and not when the new shares are allotted. This gives the investor the benefit of the earlier holding period, and they do not lose the benefit of long-term capital gains. It also has to be remembered that in the demat account, the shares sold are taxed on the First In, First Out method, which means that the initial shares that came into the demat account are considered to have been sold first.
Taxation Of Cash Received On Fractional Shares
One part of the transaction where the shareholder will not have any control over the implications is the fractional shares that they are entitled to get. They will get cash for the fractional holding, and these would be taxed as capital gains in their hands. The good part is that this will be a very small amount for the shareholders, so it would not have any big impact. The amount that is received as cash against the fractional shares would have to be reduced by the cost of that part of the holding, and the net amount would have to be taxed as capital gains, with the nature of the gains depending on the period of holding.
Overall Tax Impact
Investors holding just HDFC Bank shares would not have any implication, as they would continue to hold the existing shares without any change. Investors who held HDFC shares in multiples of 25 shares would have no immediate impact until the time they sold the new HDFC Bank shares.
The HDFC shareholders not holding shares in multiples of 25 would get cash for fractional shares, which would be taxed.
Arnav Pandya is founder - Moneyeduschool.
